European Commission adopts final RTS under SFDR

On 6 April 2022, the European Commission adopted the final Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) and its Annexes, including the entity-level Principal Adverse Impact (PAI) reporting template and indicators (Annex 1) and the mandatory pre-contractual / periodic templates for Article 8 and 9 products (Annex 2, Annex 3, Annex 4 and Annex 5). 

The RTS will now be subject to a three-month objection period by the European Parliament and Council (extendable by another three months at their request). If, on the expiry of that period, neither the European Parliament nor the Council has objected, the RTS will be published in the OJEU and enter into force on the twentieth day following that. This should therefore mean that the RTS should appear in the OJEU around July or October. The RTS will then apply from 1 January 2023.

In terms of key changes / points to note:

• A lot of text has been moved around, and various drafting changes have been made. However, most of these changes appear to be non-substantive as they appear to condense some of the obligations (e.g. some of the pre-contractual disclosure and periodic reporting rules have been deleted from the main body of the RTS but have been retained in the mandatory reporting templates in the Annexes, so there is no substantive change) or provide further technical details to clarify certain obligations (e.g. Article 54 now specifies in more detail how sector exposures are defined, and Article 67 specifies how information on underlying investment options that have sustainable investments as their objective should be presented).
• PAI indicators: Importantly, given many firms will be collecting data on PAIs in 2022 to report in 2023, the PAIs have not been substantively changed. However, there have been some clarifications regarding specific metrics and methodologies (for instance, radioactive waste is now explicitly included in the hazardous waste ratio PAI). 
• Composition of Article 9 products: Recital 15 in the RTS further reinforces the emerging sentiment from Europe that Article 9 funds should only comprise sustainable investments (other than cash held as ancillary liquidity or hedging instruments). However, Recital 15 is also interesting as it states that Article 9 products “can to some extent make other investments where they are required to do so under sector specific rules”. However, no further guidance is given on what that means in practice.
• Composition of Article 8 products: Recital 12 in the RTS reiterates the old list in the SFDR RTS of instruments that will not be regarded as promoting the E/S characteristics of, or being sustainable investments within, Article 8 products. The list includes “hedging instruments, unscreened investments for diversification purposes, investments for which data are lacking or cash held as ancillary liquidity”. Interestingly, instruments for which data is lacking was not included as an example category for Article 9 products under Recital 15, which suggests that instruments for which there is insufficient data to verify that they are sustainable investments, cannot be included in an Article 9 product.
• Graphical / quantitative disclosure of Taxonomy alignment: The updated RTS and templates indicate that graphical / quantitative disclosure on the extent to which a product is Taxonomy aligned will:
  • be required for Article 9 funds and Article 8+ funds (i.e. Article 8 funds which commit to make sustainable investments) that make one or more environmentally focused sustainable investments – and unhelpfully it looks like this will be the case even if the Article 9 / 8+ fund does not wish to take the Taxonomy into account (i.e. a 0% Taxonomy alignment disclosure will end up being disclosed by such funds);
  • not be required for Article 8 funds that do not make sustainable investments or Article 9 / 8+ funds that only focus on social sustainable investments – for these funds, the fact that the fund is not aligned with the current environmental Taxonomy will be conveyed in the box at the start of the pre-contractual and periodic reporting templates.