Pre-contractual disclosures are the information that investors must receive before making an investment decision. For Article 8 products, the RTS specifies exactly what this information must contain and how it must be presented, using standardised templates in Annexes II and III.
In plain English: think of the Article 8 pre-contractual disclosure as a structured fact sheet that the regulator has designed. You cannot write it in your own format. You must fill in the specific sections the RTS prescribes, in the order it prescribes them. This makes it comparable, an investor can read the same sections in Amundi's disclosure and BlackRock's disclosure side by side.
This lesson examines these templates in detail, explaining what each section requires and how to approach completing them compliantly.
The Two Article 8 Templates
Annex II applies to Article 8 products that use a designated index as a reference benchmark consistent with the E/S characteristics promoted.
Annex III applies to Article 8 products that do not use a designated index as a reference benchmark.
Most Article 8 products fall under Annex III, since designating a specific index as a reference benchmark for the promoted characteristics is not required, it is optional. However, where a fund does track a specific ESG index (e.g., an MSCI ESG Leaders index) as part of its strategy, it should use Annex II.
Annex III, Article 8 Without Benchmark (Most Common)
The Annex III template is structured as a set of mandatory disclosure sections. Firms must complete each section accurately and completely, using the template's prescribed section headings and order.
Section 1: "Does this financial product consider principal adverse impacts on sustainability factors?"
This section requires a binary answer (Yes/No) plus explanation.
If Yes: The product must identify the specific PAI indicators considered and explain how they are considered in the investment process. This does not require full PAI statement-level detail but must be meaningful.
If No: The product must explain why PAI are not considered. Note that while entity-level PAI consideration is comply-or-explain for firms below 500 employees, at the product level the template asks this as a disclosure question about the product's specific approach.
Section 2: "What are the binding elements of the investment strategy used to attain the environmental and/or social characteristics promoted by this financial product?"
This is the core substantive section of the Article 8 disclosure. It must describe:
- The specific E/S characteristics promoted (concrete, measurable terms)
- The binding investment strategy elements that implement those characteristics
- The proportion of investments committed to meeting the E/S characteristics ("minimum proportion" language)
"Binding" is the critical word. The RTS (Recital 11) states clearly that only criteria that are systematically applied and cannot be overridden at the manager's discretion qualify as binding. A fund that "aims to" or "seeks to" promote characteristics without mandatory implementation criteria does not meet the standard. The distinction is between investment policy language (binding) and investment objective language (aspirational).
Good practice example of binding elements:
"The Fund applies the following binding investment criteria:
- Negative screens: Exclusion of all companies deriving >5% of revenue from coal mining, thermal coal power generation, tar sands extraction, or controversial weapons manufacture. These exclusions are applied before portfolio construction and cannot be overridden.
- ESG rating floor: Minimum MSCI ESG rating of BB for all equity investments. Companies rated B or below are excluded from the eligible universe.
- Carbon intensity target: The portfolio's weighted average carbon intensity (Scope 1+2, tCO₂eq/€1M revenue) must remain at least 30% below the weighted average carbon intensity of the MSCI World Index at all times."
Section 3: "What is the minimum proportion committed to sustainable investments?"
If the Article 8 product makes sustainable investments (as defined in Article 2(17) SFDR), it must state the minimum percentage of the portfolio committed to sustainable investments. This percentage should be realistic and achievable given the investment strategy.
If the product does not make sustainable investments, the template requires the mandatory statement: "This financial product does not have sustainable investment as its objective and will only make sustainable investments incidentally, if at all."
Even where sustainable investments are made, the template still requires the following additional mandatory statement: "This financial product promotes environmental/social characteristics but does not have sustainable investment as its objective."
Section 4: "What are the sustainability indicators used to measure the attainment of each of the environmental or social characteristics promoted?"
For each E/S characteristic promoted, the product must identify specific, measurable sustainability indicators that demonstrate whether the characteristic is being achieved. These indicators must be monitored throughout the investment period and reported on in the periodic report.
Example, sustainability indicator for a fund promoting low carbon:
"E/S Characteristic: Low carbon intensity
Sustainability Indicator: Weighted Average Carbon Intensity (WACI) of the portfolio (Scope 1 + Scope 2 emissions of investee companies, per unit of revenue, weighted by portfolio allocation)
Measurement: The WACI is calculated monthly using data from [Provider X]. The portfolio's WACI is compared to the WACI of the MSCI World Index. The Fund's investment strategy requires that the portfolio WACI is at least 30% lower than the benchmark WACI at all times.
Monitoring frequency: Monthly. Any breach of the 30% minimum reduction is escalated to the portfolio manager for immediate remediation."
Section 5: "What is the asset allocation?"
This section requires a breakdown of the product's investments into:
- "Aligned with environmental and/or social characteristics": Investments that contribute to the promoted characteristics or are sustainable investments
- "Other investments": All other investments (cash, derivatives, investments not contributing to the characteristics)
The minimum proportions must be disclosed, along with an explanation of what types of investments fall into "other" and why they do not undermine the promoted characteristics.
Section 6: "Does this financial product consider good governance of the investee companies?"
A mandatory Yes/No plus description of the approach. The description must cover how the manager assesses good governance, including:
- The criteria used (e.g., board composition, remuneration policies, tax practices, audit quality)
- The data sources used
- What action is taken when governance concerns are identified
Section 7: "What methodologies are used to assess environmental and/or social characteristics?"
A description of the methodologies used to implement the binding investment criteria, how ESG data is sourced, how scores are constructed, how the criteria are operationally implemented in the investment process.
Annex II, Article 8 With Benchmark
The Annex II template adds several elements to Annex III:
Additional section: "How does the designated reference benchmark reflect the environmental and/or social characteristics promoted?"
This requires:
- The name of the benchmark index
- An explanation of how the index's construction methodology aligns with the promoted E/S characteristics
- A comparison of the benchmark's coverage of the promoted characteristics versus a broad market index
The RTS (Recital 19) notes that Article 8(1)(b) requires FMPs to disclose whether and how a designated index is consistent with the promoted characteristics, this is an explanation requirement, not a requirement to have a benchmark that fully embeds the characteristics.
Real-world example, Annex II disclosure for an ESG leaders fund:
A fund tracking the MSCI World ESG Leaders Index would use Annex II and include a section explaining:
- The index selects the top 50% ESG-rated companies within each GICS industry group, based on MSCI ESG Ratings.
- The index construction methodology systematically favours companies with lower carbon intensity, higher board gender diversity, and stronger human rights policies compared to the MSCI World Index.
- Companies with involvement in controversial weapons, tobacco, or severe UNGC violations are excluded.
This benchmarked approach provides investors with clear reference points for how the promoted ESG characteristics are implemented, they can look up the MSCI index methodology and see the full selection criteria.
Common Compliance Issues with Article 8 Pre-Contractual Templates
- Vague characteristic descriptions: "Promoting ESG" or "integrating sustainability" without specific characteristics
- Non-binding language: Using "aims to" or "seeks to" instead of prescriptive policy language
- No minimum proportion commitment: Failing to state any minimum proportion of portfolio committed to E/S characteristic implementation
- Missing good governance section: Entirely omitting the good governance assessment description
- Wrong template used: Using a pre-RTS format disclosure after January 2023
- Internal inconsistency: Pre-contractual template showing different sustainability indicators than the periodic report
Key Takeaways
- 1Most Article 8 products use Annex III (no benchmark); Annex II applies only when a designated ESG index serves as the reference benchmark
- 2The binding elements section is the core of the Article 8 template - only criteria that are systematically applied and cannot be overridden qualify as binding
- 3If the product makes no sustainable investments, include the mandatory statement: 'This financial product does not have sustainable investment as its objective'
- 4Each promoted E/S characteristic must have a specific, measurable sustainability indicator with defined monitoring frequency and breach escalation procedures
- 5The asset allocation section must clearly separate investments aligned with E/S characteristics, sustainable investments, and other investments (cash, derivatives, hedging)
- 6Common failures include vague characteristic descriptions, non-binding language, missing good governance sections, and using pre-RTS formats after January 2023