ESAs deliver final report on draft RTS under the Sustainable Finance Disclosure Regulation

On 4 February 2021, the European Supervisory Authorities (ESMA, EIOPA and EBA) delivered to the Commission the Final Report on the draft Regulatory Technical Standards (RTS) under Sustainable Finance Disclosure Regulation (SFDR) - setting out the proposed content, methodologies and presentation of the necessary sustainability-related disclosures.

The Commission now has three months to decide whether to adopt the RTS.

We understand that the Commission may be considering to adopt together the SFDR RTS, the related delegated acts under MiFID, AIFMD and UCITS and possibly also the delegated act with the technical screening criteria for the first two environmental objectives under the Taxonomy Regulation around April. However, this is as yet unconfirmed.

This package would be accompanied by an explanatory document clarifying how these measures fit together.

Adoption of the RTS by the Commission would trigger a three-month scrutiny period for the European Parliament and Council - which can be extended by a further three months at their request. If no objection is raised, the RTS would be published in the Official Journal of the European Union.

As expected, the ESAs have proposed in the draft RTS that the application date should be 1 January 2022.

The ESAs have also announced their plan to issue a public supervisory statement before 10 March 2021 in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.

The ESAs will also publish a consultation on taxonomy-related product disclosures under the Taxonomy Regulation which amends the empowerments in Articles 8(4), 9(6) and 11(5) of the SFDR.

The main proposals (as noted by the ESAs) are as follows.

Entity-level principal adverse impact disclosures

The principal adverse impacts that investment decisions have on sustainability factors should be disclosed on the entity’s website. 

The disclosure should take the form of a statement showing how investments adversely impact indicators in relation to:

• climate and environment; and
• social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.

The ESAs have updated the list of indicators for principal adverse impacts. The principal adverse impact reporting in the SFDR is based on the principle of proportionality – for companies with fewer than 500 employees, the entity-level principal adverse impact reporting applies on a comply-or-explain basis.

Product level disclosures 

The sustainability characteristics or objectives of financial products are to be disclosed in an annex to the respective sectoral pre-contractual and periodic documentation in mandatory templates and on providers’ websites.

Proposals are as follows:

• Pre-contractual information should include details on how a product with environmental or social characteristics/sustainable investment objective meets the characteristics/objective.
• Information on the entity’s website on the environmental or social characteristics of financial products/sustainable investment objective of the product and the methodologies used.
• Information in periodic reports specifying: (i) the extent to which products met the environmental and/or social characteristics by means of relevant indicators; and (ii) for products with sustainable investment objectives, including products whose objective is a reduction in carbon emissions information.
• Information in relation to the ‘do not significantly harm’ principle, specifying: the details for how sustainable investments do not significantly harm sustainable investment objectives.

As the ESAs were not empowered to differentiate the disclosures between financial market participants and products, the RTS contain a harmonised approach to all financial products. Therefore, the same disclosures are required for a very broad range of products attached as annexes to existing sectoral disclosure documents that have different levels of granularity and length.