EU: Updated ESAs Supervisory Statement on SFDR and Taxonomy

The European Supervisory Authorities (ESAs) have published their updated supervisory statement on the application of the SFDR and the Taxonomy in light of the Level 2 delay. 

The new statement replaces the initial joint supervisory statement published in February 2021. 

Many of the changes essentially just change the dates in the previous guidance. The guidance on the SFDR itself is also largely as expected in light of other supervisory statements around the delays, notably:

• As expected, the ESAs confirm that the first entity level PASI report due in June 2023 (covering the 2022 reference period) will need to be made under the Level 2 standards.
• Also as expected, the ESAs confirm that periodic reports made under Article 11 of the SFDR in 2023 will need to comply with the Level 2 standards (irrespective of reference periods).

Where the updated supervisory statement is less helpful is in respect of Taxonomy disclosures. To summarise the ESAs' guidance:

• They indicate that for Article 8 and 9 products, an “explicit quantification should be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned”. This numerical disclosure can be accompanied by a qualitative clarification “explaining how the financial product addresses the determination of the proportion of taxonomy-aligned investments of the financial product, for example by identifying the sources of information for that determination”. But the disclosures should not go beyond what is required by Article 5 of the Taxonomy Regulation.
• Disclosures should not reference Taxonomy eligibility (only alignment).
• Estimates should not be used, but firms can rely on “equivalent information on taxonomy alignment” where mandatory taxonomy alignment disclosures are not available (which they of course are not).
• They indicate that periodic disclosures made after 1 January 2022 (regardless of reference periods) should include Taxonomy disclosures.

This is unhelpful on a number of fronts:

• Firstly, the guidance seems intended to prevent Level 1 disclosures under the Taxonomy taking a more hedged/caveated and qualitative approach (notably some trade associations have tried to clear such approaches with EU authorities), and seems to suggest the ESAs expect Article 8/9 funds to give an exact % number of Taxonomy alignment in all cases. However, for products that do not purport to be Taxonomy-aligned, it is not clear whether they expect products to say they are 0% Taxonomy aligned or whether they would be ok with a simple statement that the product does not consider the Taxonomy at all. (It is not clear that there is any practical difference between these two disclosures and given that the Level 2 templates just allow firms to say that the Taxonomy is not considered, we think that the simple statement approach can still be justified.)
• Secondly, the guidance seems to fire a “warning shot” on using estimates/proxies to arrive at Taxonomy-alignment % disclosures.
• Thirdly, the statement that periodic disclosures on Taxonomy alignment are required in 2022 is unhelpful, as there was an argument that disclosures made in 2022 with respect to 2021 reference periods would not need to include Taxonomy disclosures given they would be in relation to a period that pre-dated the application of the Taxonomy. However, the guidance that disclosures can include qualitative information may be helpful in mitigating this, as it seems to offer some space for firms to, for example, explain why they are giving a 0% or no Taxonomy consideration disclosure for a 2021 period even if they are committing to a Taxonomy alignment % going forward (since that would seem to constitute “explaining how the financial product addresses the determination of the proportion of taxonomy-aligned investments” per the ESA guidance).