EU Commission confirms delay to SFDR Level 2 rules

In mid-September we heard rumours that the EU Commission was considering delaying application of the detailed Level 2 rules under the EU Sustainable Finance Disclosure Regulation (SFDR) until January 2022.

The Commission has now confirmed this in a letter it sent to various trade associations on 1 October.

The letter does not specify when the Level 2 will apply although refers to the requested date of January 2022. Level 1 continues to apply from March 2021.

Whilst there is no Level 2, the obligation will be for compliance with the Regulation’s “high level and principle-based requirements”. These will be most relevant to:

• Obligations relating to integration of sustainability risks (Art. 3, 5 and 6): In the Commission’s view, FMPs already have to consider these risks in their internal processes (e.g. under MiFID II risk management requirements) and therefore the Regulation only requires transparency in this respect. We don't agree with the Commission’s conclusion here – for example firms have not had to consider sustainability risks as part of remuneration standards previously.
• Entity level PASI disclosures (Art. 4): according to the Commission some FMPs already comply with the non-financial reporting requirements under NFRD or similar international standards and could use that information to comply with the PASI requirements. However, there are question marks around how many firms currently have to do this (the industry says not many), and whether this information would really meet the requirement.
• Art. 8 and 9 product level disclosures: the Commission’s view is that FMPs currently have to describe under applicable sectoral legislation how “bespoke levels of sustainability are achieved” by their products and so should already be complying with the Article 8/9 disclosure requirements. We don't agree with the Commission’s position here – whilst firms have obligations to be fair, clear and not misleading etc. under sectoral laws, those requirements don't go to the level of prescription set out in the SFDR Level 1 rules.