EU SFDR: more changes to come to the RTS as the ESAs prepare further amendments

In case you wondered whether the progress of the Sustainable Finance Disclosure Regulation's Level 2 technical standards could get any more complicated, the answer is emphatically: yes!

Recap on the SFDR RTS’ tortuous journey so far:

• Seven draft RTS were submitted to the Commission in February, and then six more in October, last year.
• The Commission decided to bundle the 13 RTS together into a single delegated regulation, which was adopted on 6 April 2022.
• This SFDR Delegated Regulation will apply from 1 January 2023 (subject to the non-objection of the EU Parliament and Council).

Recently, two further mandates to make amendments to the SFDR Delegated Regulation have been announced:

• Amendments relating to the exposure of financial products to investments in fossil gas and nuclear energy activities to reflect the Climate Delegated Act have been requested from the ESAs. The ESAs have until 20 September 2022 to submit their proposal to the Commission. At present, it is very unclear how this will work with the 1 January 2023 application of the SFDR Delegated Act. It seems to be the intention that an urgency procedure would be used to push the draft RTS through without consultation, however this does not seem realistic at this stage or in light of past experience. We are staying close to the timing developments of this and will keep you updated. (See letter received on 8 April).
• Amendments relating to principal adverse impacts indicators and to the transparency of financial products’ disclosures are requested from the ESAs. The new draft RTS should be submitted to the Commission by April 2023. This amendment does not affect the implementation of the SFDR Delegated Regulation (which should still apply from 1 January 2023 subject to the non-objection of the EU Parliament and Council). (See letter received on 28 April).

Some more information on the new mandates:

Fossil gas and nuclear

• The ESAs have been asked to propose amendments to the information that should be provided in pre-contractual documents, on website and in periodic reports about the exposure of financial products to investments in fossil gas and nuclear energy activities, reflecting the provisions set out in the Complementary Climate Delegated Act. 
• The amendments should cover pre-contractual and periodic documents or information referred to in Article 6(3) and Article 11(2) SFDR and the product disclosures to be made on websites referred to in Article 10(1) SFDR, for financial products referred to in Article 8(1) to (2a) SFDR and in Article 9(1) to (4a) SFDR. 
• Amendments must be submitted to the Commission by 30 September 2022. 
• The amendments to the Delegated Regulation will have to ensure that the disclosures about the degree to which investments are in taxonomy-aligned activities provide for full transparency about investments in fossil gas and nuclear energy activities, in particular on the proportion such investments represent within all investments and in environmentally sustainable economic activities.

Principal adverse impacts indicators and transparency

• The European Commission has sent a request to the ESAs for new draft regulatory technical standards under SFDR on principal adverse impacts indicators (Articles 4(6) and (7) SFDR) and transparency of financial products (8(3), 8(4), 9(5), 9(6), 10(2), 11(4) and 11(5) SFDR).
• As noted above, the new draft RTS should be submitted to the Commission by April 2023, and this does not affect the implementation of the RTS adopted by the Commission last month (which should still apply from 1 January 2023 subject to the non-objection of the EU Parliament and Council). 
• This seems to reflect a recognition from the Commission that the current SFDR RTS are not ideal but that implementation of the RTS in their current form cannot be delayed further (and therefore the Commission has embarked upon this review process instead).
• The Commission has said that amendments to the SFDR RTS are necessary to appropriately reflect the new factual and regulatory situation in a “novel and fast evolving area”, and to strengthen the disclosure and effectiveness of decarbonisation actions by financial market participants for all financial products.
• Principal adverse impacts indicators: Amendments to the RTS should aim at broadening the disclosure framework and addressing the main technical issues that have emerged since the SFDR was originally agreed. The ESAs are then invited to (1) streamline and develop further the regulatory framework, (2) consider extending the lists of universal indicators for principal adverse impacts, as well as other indicators, and (3) refine the content of all the indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation.
• The Commission says that a guiding principle for amendments to the regulatory technical standards should be to reduce the risk of ‘false certainty’ and potential ‘safeguards washing’ by requiring well-substantiated evidence that investments align with the safeguards, and that implementation and application efforts do take place. At the same time, the amended RTS should be carefully calibrated so that disclosures based on these indicators are proportionate and feasible for financial market participants. The ESAs should inform their changes to the technical regulatory standards with the results of the stocktaking for the annual report envisaged in Article 18 SFDR (by 10 Sept 2022 the ESAs must submit a report on best practices and recommendations on voluntary reporting standards).
• Transparency by financial products: Amendments to the RTS should cover the information provided in relation to financial products in pre-contractual documents, on websites, and in periodic reports on decarbonisation targets, including intermediary targets and milestones, and actions pursued. The ESAs should also consider whether the provisions in the RTS on financial products of Article 5 and 6 of the Taxonomy Regulation sufficiently address the disclosure and information on environmentally sustainable economic activities. The ESAs are thus invited to propose amendments on pre-contractual and periodic documents or information under Article 6(3) and Article 11(2) SFDR and on website product disclosures in Article 10(1) SFDR for financial products referred to in Article 8(1) to (2a) SFDR and in Article 9(1) to (4a) SFDR.
• Following the submission of the new draft RTS in Q1 2023, the Commission will then have 3 months to decide whether to adopt the new RTS.
• Neither of these suggested themes for revision are particularly good news for firms subject to SFDR. In particular, the suggestion of changing the PASIs framework is concerning, as collecting data for the current list of PASIs has already proved to be challenging, and therefore the suggestion that the indicators should be expanded or more tightly defined in future is likely to complicate this process. In addition, given the centrality of PASIs for the DNSH test for SFDR sustainable investments, it obviously increases the risk that investments classified as sustainable investments currently might not be so classified in future once the PASIs change.