Despite the main disclosures required pursuant to Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR) being applicable since 10 March 2021, the long-awaited Regulatory Technical Standards (RTS) complementing and clarifying the disclosure requirements under the SFDR, have been postponed further to 1 July 2022, being six months later from the initially agreed date being 1 January 2022.
Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation) further complements the SFDR framework. This development has led to the RTS being considered by financial market participants as even more vital in assessing the format, content and layout of the relevant SFDR disclosures in conjunction with the provisions of the Taxonomy Regulation.
On 22 October 2021, ESMA eventually published the final draft RTS related to the content and presentation of disclosures under SFDR as amended by the Taxonomy Regulation, prepared by the ESAs and delivered to the European Commission.
These final draft RTS provide a set of rules and mandatory templates for pre-contractual and periodic product disclosures which (i) amend the previous set of draft RTS published on 4 February 2021, and (ii) introduce further obligations where the relevant financial products invest in sustainable investments contributing to environmental objectives as outlined in the Taxonomy Regulation.
2. Key take-aways
I. Inclusion of specific Taxonomy-related disclosure requirements
In accordance with the final draft RTS, where a financial product contributes to any of the environmental objectives listed in the Taxonomy Regulation, the relevant pre-disclosures should identify such objectives and include how and to what extent such product’s underlying investments qualify as “environmentally sustainable economic activities” in compliance with the Taxonomy Regulation (Taxonomy-Aligned Investments).
For that purpose, the final draft RTS now mention that the relevant pre-contractual document (the form of which varies according to the relevant product at stake e.g. prospectus for investment funds) and periodic reports should reflect the proportion of Taxonomy-Aligned Investments calculated from a product's underlying investments with a specific treatment of sovereign exposures. The disclosures at the level of the product need to include:
Two graphs reflecting the proportion of Taxonomy-Aligned Investments underlying the product based on a specified methodology to calculate this alignment: one graph showing the Taxonomy alignment out of all investments of the product, including sovereign bonds, and a second graph showing the Taxonomy alignment out of all investments other than sovereign bonds; and
How the Taxonomy alignment will be (for pre-contractual disclosures) or has been (for periodic disclosures) achieved, followed by an assessment by an auditor or a third party (and if so, to indicate the name of such auditor or third party).
The final draft RTS also specify the method of calculation which should be used to calculate the Taxonomy activity contribution of non-financial investees companies using key performance indicators (KPIs), one KPI being selected and indicated in the pre-contractual disclosures related to each product.
II. Changes in the presentation of sustainable related disclosures
The final draft RTS updated the presentation of the relevant disclosures suggested with the previous draft RTS, notably requiring a declaration of whether sustainable investments underlying the product are environmental or social, and if the environmentally sustainable investments are Taxonomy-Aligned Investments; such information needs to be disclosed at the beginning of the template of disclosures in pre-contractual document.
In this context, the information on whether the principal adverse impacts (PAI) on sustainability factors are considered at the level of the product would need to be disclosed before the investment strategy, and the identification of the website of the financial market participant on which further information would be available in website disclosure is now positioned at the end of the relevant pre-contractual disclosures.
In addition, the final draft RTS introduce the requirement to disclose, in the pre-contractual documents, not only whether PAI are considered, but also how they are considered, without more specification on the level of details that should be disclosed in this respect.
3. Date of application of the RTS and next steps
The final draft RTS are currently under review by the European Commission, and should they be endorsed by them, the final draft RTS need to be formally adopted within a period of three months of their publication.
In the meantime, the Taxonomy Regulation enters into force on 1 January 2022 with regards to the first two environmental objectives i.e. climate change mitigation and climate change adaptation. In this context, financial market participants and financial advisers who are subject to the SFDR in respect to their products manufactured or advised on are encouraged to consider the relevant content, format and manner of disclosures suggested by the final draft RTS, despite them not yet being formally endorsed by the European Commission.
As of today, no new guidance or recommendation has been issued by ESAs, ESMA or the CSSF regarding the potential use of the final draft RTS in the interim period before 1 July 2022. However, as it was the case following the first draft of RTS, we may expect the ESAs or the CSSF to communicate shortly in this respect to help financial market participants and financial advisers to prepare the SFDR and Taxonomy-related Level 2 disclosures in due time.