8 February 2023

EU ESG catch-up

A) EU Sustainability latest

1. SFDR RTS: draft climate act changes (gas, nuclear)

Any day now, there should be an official statement regarding the Sustainable Finance Disclosure Regulation (SFDR) technical specifications, revised by the European Supervisory Authorities (ESAs) to cover products exposed to investments in nuclear and gas.

The initial EU scrutiny period for these additional Climate Act disclosures ended last week (31 January).

The level 2 legislation adopted by the European Commission (EC), confirmed the amended SFDR RTS will enter into force three days after publication in the EU Official Journal [EUOJ].

In the meantime, there is no RTS disclosure transition guidance available to fund managers, including:

Periodic Statements: if firms must file using the new Annex format (ahead of end-April deadline)
Pre-contractual disclosures: if (and when) firms are obliged to re-issue / re-submit to their NCAs

Unless the EC / ESAs make available guidance (promptly), financial market participants will rely on the local instructions provided by each national competent authority (NCA), akin to the recent PRIIPs experience.

NB: A reminder of the CSSF recent advice stating “the mere introduction of the templates in order to comply with the applicable legal and regulatory requirements does not qualify as material change”. This follows their Q4-2022 SFDR pre-contractual ‘fast-track’ visa-stamp process, requiring a 2-month advance notice period.

2. FinDatEx: publish EET v1.1.1

Ahead of the revised SFDR RTS legal publication, FinDatEx has now formally published their European ESG template (EET) version 1.1.1 (which now includes supplementary fossil gas and nuclear data fields).

EET V1.1.1 will now co-exist with versions 1.0 and 1.1 in a transition period that ends on 30 April 2023.

Later this year, the EET working group will “revisit and restructure the EET and transfer the supplementary fields to the main structure of the EET”.

NB: This month, Kneip continues to promote the EET as the industry standard for ESG data exchange:

EET / SFDR Disclosure update: co-presented with ALFI, 1 Feb 2023
A practical guide to the EET: co-presented with EFAMA, 13 Feb 2023

3. SFDR RTS: corrigenda published

On 27 December, a Corrigenda to the current SFDR RTS was published in the EUOJ; this amends both article 8 product disclosure templates (cf. 25 July 2022 RTS).

Annex II (Pre-contractual): 3 x changes – sections added, removed; subsection repositioned
Annex IV (Periodic report): 1 x change – notes box repositioned

NB: Annexes (III, V) for article 9 products remain unchanged. The format of all template specifications is now aligned with the versions included in the pending Climate Act (gas, nuclear) RTS updates.

4. CSSF: SFDR data collection

Last week, the Luxembourg CSSF announced a local SFDR data collection exercise.

An assessment of investment fund managers (IMFs) compliance with their SFDR obligations is said to be necessary, to allow the CSSF to “fulfil its supervisory duties”.

IMFs are requested to complete the eDesk questionnaire (‘SFDR-IFM disclosures’) before 2 March 2023. Ongoing, firms must ensure that information provided to the CSSF is kept up to date.

At this stage, the focus relates to each IFM’s ‘organisational arrangements’, recently updated to take account of sustainability risk integration; the assessment covers human resources and governance, investment decisions, advice process, remuneration and risk management policies and conflicts of interest.

In the “near future”, the data collection exercise will be extended to include SFDR RTS information contained in the product-level precontractual & periodic disclosure templates and in the entity-level PAI statements.

5. Morningstar: latest SFDR product analysis (incl. EET)

Morningstar’s latest quarterly SFDR analysis is required reading for those keen to assess the latest impact of the SFDR/TR technical standards applied on 1 January 2023.

Key findings as at Q4-2022 (based on collected data from 98.2% of fund prospectuses) include:

‘Unsustainable’ products: market share fell to 44.2% [€3.6 trillion AUM]
‘Sustainable’ products: market share increased to 55.8% [€4.6 trillion AUM]
Article 9 products: (‘dark-green): 3.3% [€270 billion AUM]
Article 8 (‘light-green’) products:2% [€4,320 billion AUM]

Over 40% [€175 billion] of art.9 products were downgraded to art.8 category last quarter; most of these were passively managed (see next item).

There is also an interesting European ESG Template (EET) chapter (p.30).

This follows analysis of 96,082 share classes in relation to key SFDR/EET criteria (i.e. Principal Adverse Impact (PAI), Minimum or planned ‘sustainable’ investments and / or Taxonomy-aligned investments).

6. EC: some ESG guidance begins to appear

In early December (ahead of the SFDR RTS legal application), the EC pledged to make available SFDR guidance “very soon…early next year”, to provide “clarity on specific points” to help mitigate ‘greenwashing’.

They presumably referred to the ESA’s list of SFDR L1 queries, supplied three months earlier; this included the legal definitions of ‘sustainable investment’ and ‘consideration’ of principal adverse impact.

At the time of writing, these key SFDR clarifications have yet to appear; latest reported EC publication estimates range between April and October this year. This is said to leave actively managed fund firms dependent on legal guidance in a state of “limbo”; also unresolved are varying market approaches over how exactly companies and assets can be regarded as ‘sustainable’.

Separately, the EC recently drafted two detailed FAQs in relation to the EU Taxonomy regulation (TR):

Climate Delegated Act: guidance in relation on the technical screening criteria (78 pages, 187 x Q&As)
Taxonomy Disclosure Delegated Act (art.8 TR): latest guidance for financial and non-financial undertakings, including KPIs (30 pages, 34 x Q&As).

7. SMSG: provide greenwashing response to ESMA

The Securities and Markets Stakeholder Group (SMSG) response to ESMA’s recent greenwashing Call for Evidence attracted a lot of media attention. Key observations include:

The ESAs should reclassify current SFDR product categories, given:
8 products: are a category “so broad that… virtually anything can fit into it“
9 products: now risk becoming “null” in the marketplace
There must be a clear definition of greenwashing (renamed to ‘ESG-washing’)
‘Green-bleaching’ of products remains an unresolved risk
SFDR ‘misrepresentation’: NCAs should distinguish between intended and un-intended cases

8.ESMA: present impact assessment of pending ESG fund naming rules

ESMA’s separate consultation on ESG / sustainability-related terms in fund names will end on 20 February.

At their recent public event, ESMA pointed to 4,192 [14%] of EU funds screened that currently use at least one ESG / ‘sustainability’ related word in their name. They say 67% of these are classed as article 8 products, which face impact from the pending minimum 40% of sustainable investment threshold rule.

A recording of this event is now available, alongside the slide deck presented.

There are separate concerns that ESMA’s additional ’minimum safeguards’ rule present a direct challenge to ‘Climate Transition’ funds (investing in companies actively decarbonizing their business).