What do the ESAs say about compliance with Level 1 SFDR whilst Level 2 is on its way?

Following an unprecedented volume of responses to the first draft of the regulatory technical standards which will accompany the Sustainable Finance Disclosure Regulation ("SFDR"), the European Supervisory Authorities (“ESAs”) published updated draft regulatory technical standards (“Draft RTS”) in early February. If approved, these will come into force on 1 January 2022. Level 1 SFDR applies from 10 March this year.

Whilst the development of these Draft RTS is critical in providing clarity to the market, the delay between the application of Level 1 and Level 2 creates uncertainty as to what the requirements for compliance will be in the interim period.

To address this, yesterday the ESAs published a joint supervisory statement in which they have unhelpfully recommended that the Draft RTS should be used as a reference point by firms and national competent authorities in this interim. This is an unhelpful suggestion, noting that the Draft RTS has still not been finalised, and seems to depart from a more principles-based approach suggested previously by the European Commission.

However, we do not consider that this suggestion imposes a requirement for firms to pre-comply with the Draft RTS (as the document goes on to state that firms should use the interim period to prepare for compliance with the RTS from 1 January 2022) – but it may encourage certain competent authorities to be more hard-line in their supervisory approach during this interim period.

The supervisory statement also includes a timeline of key SFDR deadlines and unhelpfully states that for financial products that don't consider PASIs, firms must publish the SFDR Article 7(2) statement by 10 March 2021. Although the CSSF had previously suggested this interpretation, this was not a commonly held view (noting that Article 7(1) indicates that product level PASI statements must be made by 30 December 2022) and does not give firms much time to update their product documentation.

Read our note for more detail on the Draft RTS and the ESAs accompanying supervisory statement.