The European Supervisory Authorities ('ESAs') have submitted a list of questions to the European Commission about the interpretation of the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. 

The ten questions focus on:

  • Principal adverse impact (PAI) disclosures and whether a financial market participant is able to not consider PAI at entity level but nevertheless consider PAI under Article 7 SFDR for some of the financial products it manages.
  • Financial advisers and recommendations of financial products.

  • The transparency of the integration of sustainability risks and rules for financial products that are no longer made available.

  • Good governance practices, including financial products investing solely in government bonds.

  • The scope of Articles 5 and 6 of the Taxonomy Regulation.

The Commission will now look into the questions and reply by means of a Commission Decision (per the previous Q&As). There’s no clear timeline for next steps – but as a precedent, last year the ESAs submitted questions to the Commission in January and only got the replies in late July. The new questions from the ESAs are pasted below for your reference.

Some of these questions seem liable to elicit potentially difficult answers (in the sense that the industry has already broadly come to an interpretation on them and so if the Commission took a contrary view, it could require significant changes to the prevailing compliance approach). In particular, Questions 1, 6 and 10 seem like the ones that are re-treading fairly established industry views, so the answers will be consequential.

------------------------------

Principal adverse impact (PAI) disclosures 

Question 1: Is it possible for financial market participants that are below the threshold set by Article 4(3)-4(4) SFDR and choose not to consider adverse impacts of investment decisions on sustainability factors at entity level (Article 4(1)(b) SFDR) to indicate that they do consider principal adverse impacts (PAI) at product level only for a certain subset of financial products? In other words, can a financial market participant not consider PAI at entity level but nevertheless consider PAI under Article 7 SFDR for some of the financial products it manages, and if they do so, can they disclose this under article 4(1)(b) SFDR?

Financial advisers 

Question 2: Do financial advisers, when providing MiFID II investment advice, have to comply with disclosure obligations in Article 6(2) SFDR in good time before the client is bound by any agreement for the provision of investment advice "as a whole" (i.e. not only limited to financial products as defined by SFDR, but also any financial instrument as defined by MiFID II), or for each single recommendation concerning a "financial product" as defined by Article 2(12) SFDR?

Question 3: For the purpose of the disclosure of principal adverse impacts under Article 4(5)(a) SFDR, when a financial adviser recommends financial products or instruments that are not collective or individual portfolios managed by a financial market participant, should it also collect information from non-financial companies for those products and instruments in order to take those into account for the principal adverse impact disclosure?

Question 4: If a financial adviser only considers in its advisory process products which are not in scope of SFDR (i.e. shares of listed companies, corporate bonds, etc.), should the financial adviser still comply with the obligations laid down in Articles 3, 4, 5, 6 and 13 SFDR?

Question 5: Article 17 SFDR exempts insurance intermediaries which provide insurance advice with regard to IBIPs and investment firms which provide investment advice that are enterprises irrespective of their legal form, including natural persons and self-employed persons, provided that they employ fewer than three persons. As there is no definition of “employ” or “employee” in SFDR, how are self-employed staff, owner managers or part-time employees counted?

Transparency of the integration of sustainability risks and rules for products no longer made available 

Question 6: Do Articles 6 and 7 SFDR apply only for new financial products or also for existing financial products on the date of application, 10 March 2021 (even for those financial products that are no longer made available to investors)? Specifically, do Articles 6 and 7 SFDR apply for existing portfolio management financial products?

Question 7: Do financial products that are no longer made available to new investors have to: (a) update and deliver the pre-contractual disclosures under Article 6 and 7 SFDR to existing investors; and (b) provide website and periodic disclosures under Articles 7, 10 and 11 SFDR to existing investors?

Good governance practices 

Question 8: If a financial product disclosing under Article 8 or 9 SFDR does not invest in companies with good governance, is that product able to continue disclosing under Article 8, 9 and 11 SFDR?

Question 9: Considering that the reference to good governance in Article 8 SFDR only relates to 'companies', and that Article 9 SFDR, via the definition of 'sustainable investment' in Article 2(17) SFDR, specifically relates to 'investee companies', can a financial product investing solely in government bonds while applying an ESG investment strategy be considered to fall under either Article 8 or Article 9 SFDR?

Scope of Article 5-6 of the Taxonomy 

Question 10: In case a financial product referred to in Article 8 SFDR which promotes environmental characteristics does not commit in the precontractual disclosures to invest in any economic activities that contribute to an environmental objective within the meaning of point (17) of Article 2 SFDR, is the financial market participant obliged to disclose the information required by Article 6 TR? If it is determined later that the same financial product in fact invested in such economic activities, is the financial market participant obliged to make that disclosure?

Similarly, in case a financial product referred to in Article 9 SFDR only committed in the precontractual disclosures to invest in economic activities contributing to social objectives and if it is determined later that the financial product in fact invested in economic activities contributing to an environmental objective, would the financial market participant be obliged to disclose the information required by Article 5 TR?