5 February 2021

ESAs issue Sustainable Finance final report / draft RTS

“The significant set of rules issued today strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they will be included in documents that are very diverse in length and complexity. The ESAs have listened to the consultation feedback from stakeholders and have adjusted the proposed disclosures”.

On Thursday afternoon, the ESAs delivered their Final Report covering the Sustainable finance disclosures regulation (SFDR) to the European Commission (EC), including a revised draft Regulatory Technical Standards (RTS ).

The proposed legal application date (level 2) is 1 January 2022.

Here is a short summary of the ESA’s finalised proposals (194 pages in total).

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As before, the revised RTS covers 2 x levels of sustainability disclosure:

A) Entity-level

i.e. principal adverse impacts (PAIs) that investment decisions have on sustainability factors. These have to be disclosed on the websites of financial market participants, in the form of a statement with set indicators in relation to:

  • climate and environment
  • social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.

The ESAs have reduced PAI disclosure to 14 x mandatory indicators (from the revised ‘climate and environment indicators table), with at least 2 x additional indicators selected from other tables.

The SFDR entity-level reporting is based on the principle of “proportionality” – i.e. for companies with fewer than 500 employees, the PAI reporting applies on a comply-or-explain basis.

The “mandatory reporting template” for the principal adverse sustainability impacts statement can be found in Annex I (pages 52- 81).

B) Product-level

Where products are deemed to be in scope of SFDR, sustainability characteristics or objectives of financial products are to be disclosed in an annex to the necessary pre-contractual documentation (e.g. Prospectus) and periodic reporting (e.g. Annual Statements) and made available on providers’ websites.

Details are outlined in a further set of “mandatory templates”:

  • Annex II  (pages 82- 85): Pre-contractual disclosure for Art. 8 financial products [i.e. environmental and / or social characteristics]
  • Annex III (pages 86- 89): Pre-contractual disclosure for Art. 9 financial products [i.e. sustainable investment objective]
  • Annex IV (pages 90- 93): Periodic Reporting disclosure for Art. 8 financial products [i.e. environmental and / or social characteristics]
  • Annex V (pages 94- 97): Periodic Reporting disclosure for Art. 9 financial products [i.e. sustainable investment objective]

The ESA’s highlight that “…the same disclosures are required for a very broad range of products attached as annexes to existing sectoral disclosure documents that have different levels of granularity and length.”

The ESA’s state their final Report and RTS takes into consideration respondent feedback supplied during the public consultation (launched in April 2020) and include results from consumer testing exercises of their pre-contractual and periodic product templates (conducted by the Dutch financial regulator and Warsaw School of Economics).

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With the EC expected to endorse the RTS within 3 months, the ESAs plan to issue an interim public supervisory statement “to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision.”

They will also publish a consultation on additional Taxonomy Regulation-related product disclosures (e.g. climate change-related Key Performance Indicators) currently scheduled to commence within a similar timeframe to SFDR (level 2).

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