A) EU sustainable disclosure latest
1. ESA ‘level 3’ SFDR guidance now published
The European Supervisory Authorities (ESAs) have now published ‘practical application Q&As’ that were pledged back in June. This new set of guidance provides answers to 60 questions covering:
- Current value of all investments in PAI and Taxonomy aligned disclosures (Annex I)
- Principal Adverse Impact disclosures (Annex I)
- Financial product disclosures (Annexes II-V)
- Multi-option products
- Taxonomy-aligned investment disclosures
- Financial Market Participants (FMPs) and Financial advisers
The ESAs clarify that FMPs can remove the sections from SFDR precontractual and periodic disclosure templates that are deemed not relevant for their financial product in the disclosure templates, but only where these sections are accompanied by a red text instruction that explicitly limits the scope of application.
A key decision tree (p.26) depicts the situations under which respective Taxonomy-alignment disclosures apply. There is also a table of different ‘light-green’ SFDR article 8 products (p.27-28) describing some of the disclosures now expected.
Elsewhere, the ESA try to explain how the concept of ‘current value of all investments’ should be applied to Principal Adverse Impact (PAI) and Taxonomy calculations.
2. EC: major EU-ESG consultation and guidance pending
In her recent speech, the EU Finance Commissioner acknowledged an increased risk of greenwashing in the market, directly linked to the current lack of SFDR clarity within the industry.
To address “fears within the financial sector around legal and reputational risks”, Mairead McGuinness announced a series of high-profile European Commission (EC) initiatives “early next year”:
- A ‘comprehensive EC assessment’ of SFDR implementation: including a public consultation and industry stakeholder workshops, to analyse the role of SFDR to mitigate greenwashing and “ensure legal certainty”
- SFDR Q&A: the EC will issue their first set of guidance to “bring some clarity on specific points”
- TR guidance: the EC will also publish over 200 FAQs to support businesses with reporting obligations under the Taxonomy regulation.
- Taxonomy online tools: these will help stakeholders use the Taxonomy and collect usability feedback.
- ESG Ratings: the EC is considering a proposal to bring more transparency to the market and introduce rules on ESG rating agencies’ operations.
At a later stage, the EC will also issue other guidance required for the remaining four TR environmental
objectives (i.e. circular economy, biodiversity, pollution and water) that begin to apply from 1 January 2023
3. FinDatEx: key EET statement issued
On 6 December, FinDatEx published in advance the supplementary EET data fields highlighted for the draft SFDR/TR RTS, revised for the EU Climate Act (gas and nuclear activities) product disclosure.
FinDatEx have made these available in an effort to ensure product manufacturers, distributors and insurers are prepared for the likely prompt legal application in early-February 2023. The additional data fields will be formally integrated into the EET main structure “at a later point in time”.
B) Latest: EU regulators
1. Luxembourg: CSSF issues local SFDR FAQ
On Friday 2 December, the Commission de Surveillance du Secteur Financier (CSSF) published a new FAQ ahead of the local SFDR RTS application. Clarifications cover revised updates of prospectuses and new product rules (Website, Pre-contractual and Periodic disclosures) valid from 1 Jan 2023.
NB: the CSSF state (p.10) that “the mere introduction of [SFDR RTS] templates in order to comply with the applicable legal and regulatory requirements does not qualify as material change.” In other words, firms are not expected to update and re-file their prospectus and SFDR Annexes for successive RTS versions (i.e. unless / until these are legally enacted). However, the CSSF “reserve the right” to assess the materiality of any other SFDR RTS changes “on a case-by-case basis” (as per Circular 14/591).
As before, although the CSSF continue to accept SFDR product requests for approval, these are now processed on “a best efforts basis” ahead of 1 Jan 2023. We understand firms are now receiving CSSF feedback on product filings made during the “fast-track” approval process.
2. Ireland: CBI “fast-track” deadline lapses
The Central Bank of Ireland (CBI) “streamlined” SFDR product approval process ended on 1 Dec 2022.
Ongoing, firms filing prospectus and SFDR pre-contractual documents may face an extended scrutiny period before their UCITS, RIAFs or QIAFs are approved as ‘sustainable’ by the local regulator.
The CBI also recently published a 27-page Sustainable finance information note to recap the updated local asset manager disclosures, investment & risk management process.
3. France: AMF revise local filing and investor letter regimes
From 15 Dec 2022, we understand the AMF expect all prospectus filings for 2023 French market approval to include SFDR product pre-contractual disclosure (and PRIIPs KID documents), where applicable.
The AMF had already updated five local fund regimes (including French and foreign UCITS / AIFs) in relation to their existing investor ‘non-financial commitments’ doctrine. This normally obliges firms to send letters to local investors in advance of ‘significant’ changes any non-financial criteria of their products.
To avoid “excessive” SFDR client letters, the AMF confirm these are necessary only in certain cases, e.g.
- Downgrade of SFDR ‘sustainable’ product classification (e.g. Art. 9 to Art.8, Art. 8 to Art.6)
- Reduction of more than 10% in relative value and 500 points in absolute value of the fund’s minimum percentage of Taxonomy alignment or its minimum percentage of sustainable investment
- Principal Adverse Impact: the product will stop considering the main negative impacts.
4. Belgium: FSMA update electronic transmission process for UCITS / AIFs
Also last Friday, the FSMA updated their detailed Communication document to confirm how Belgian fund firms are to submit their SFDR pre-contractual disclosures (and PRIIPs KIDs) alongside the fund prospectus, ongoing.
NB: the FSMA state that when transmitting SFDR prospectus annexes, a new naming convention (see chapter p.28-37) can be applied. The old naming convention remains available only for other filing context (‘definitive documents’ scenario) until 1 June 2023.
5. Germany: no further updates
There have been no further updates since BaFin published their initial Q&A guidance document which outlined their previous understanding of Article 8 product obligation.
C) Other EU updates
1. ESAs: SFDR/TR RTS changes delayed: PAI sustainability indicators (etc)
The ESAs have formally confirmed a six-month delay to complete their review of the principal adverse impact (PAI) indicators within the current SFDR RTS product disclosures.
This means the current PAI framework (incl. known “technical issues”) will likely remain in place until 2024.
The ESAs were meant to provide the EC with a revised SFDR RTS before 28 April 2023, including an extended set of PAI universal indicators, definitions, methodologies, metrics and presentation rules.
They have now conceded a complete revision and extension of the PAI concept is a “substantial, technically demanding exercise”. Their recent letter cites “significant challenges” faced during efforts so far, including a “substantial number of technical components” and the need for extensive input from expert bodies and specialist agencies. The ESA were also diverted by the urgent delivery of other RTS updates (for fossil gas and nuclear energy amendments) required by the EC earlier this year.
NB: the ESAs made no mention of the EC mandate relating to De-carbonisation targets and milestones.
2. ESMA: consult on ESG / sustainability fund names to curb greenwashing
ESMA recently published draft guidelines covering funds’ names using ESG or sustainability-related terms.
Key proposals open for comment until 20 Feb 2023 include:
- Funds with ESG-related word in name: planned asset allocation per SFDR templates equal / above 80% threshold.
- Funds with sustainable-related word in name: within 80% threshold at least 50% allocated in sustainable investments as defined in SFDR.
- Use of ‘Impact’/‘Impact investing’: restricted for funds investing to generate positive environmental or social impact (alongside financial return).
ESMA’s proposed guidelines include five worked examples with illustrated SFDR disclosures.
Once finalised, ESMA’s guidelines seem likely to apply during Q2-Q3 2023, with a six-month transition period available for pre-existing products.
NB: Morningstar recently stated that only 18% of SFDR article 8 products currently including the word “sustainable” in their name would meet ESMA’s proposed naming rules.
Although ESMA stated they “do not intend to interfere with” with pending SFDR/TR disclosures, legal experts are reportedly warning that re-classification of ‘sustainable’ products are “not straightforward” and may generate “knock-on effects” within the industry.
3. ESA: launch Call for Evidence to “better understand greenwashing”
The ESAs also recently published a 42-page Call for Evidence on greenwashing.
They now seek input from the whole EU financial sector (incl. regulated entities and retail investors) about:
- How to understand greenwashing: including “what the main drivers of greenwashing might be”
- Examples of potential greenwashing practices: “relevant to various segments of the sustainable investment value chain / product lifecycle”
- Any available data: “to help the ESAs gain a concrete sense of the scale of greenwashing and identify areas of high greenwashing risks”.
The ESAs will consider all comments received before 11 January 2023.
4. SMSG: draft SFDR/RTS advice published
ESMA have made available previous advice from their Securities and Markets Stakeholder Group (SMSG) covering the draft SFDR/TR RTS (updated for fossil gas and nuclear energy activities) currently awaiting EU legal approval.
The SMSG highlighted the need to differentiate between SFDR Annexes, as “they cater for different needs”:
- Pre-contractual information: “should be understandable to a broad audience”, as it is meant to help investors make an informed investment decision and to enable them to compare financial products.
- Periodic reporting: is meant to “facilitate the analysis of investments and as such should also keep more specialized readers in mind.”
The SMSG also reminded ESMA of their “repeated” warnings over “unrealistic SFDR timings”, with imminent SFDR template changes set to “exacerbate this concern”.
D) UK sustainable disclosure latest
FCA consult on UK sustainability disclosure regime
Finally: over in the UK, the Financial Conduct Authority (FCA) have launched a consultation on their delayed Sustainability Disclosure Requirements (SDR) regime.
Their latest SDR proposals (179 pages) cover the following areas (with likely application dates indicated):
- A general ‘anti‑greenwashing’ rule (applied to all regulated firms): 30 June 2023
- Sustainable investment labels (x3): 30 June 2024
- Naming and marketing rules:30 June 2024
- Distributors (digital) disclosure:30 June 2024
- Consumer-facing (digital) disclosure: 30 June 2024
- Pre-contractual disclosures (e.g. prospectus): 30 June 2024
- Sustainability product report (incl. ongoing performance indication): 30 June 2025
- Entity Level disclosures (phase 1: firms > £50 bn): 30 June 2025
- Entity Level disclosures (phase 2: firms < £50 bn): 30 June 2026
SDR will apply only to UK-based Funds and portfolio managers; overseas products are not yet directly included in scope (although this may change in due course).
It is not based on the UK Green Taxonomy; it extends the local Task Force on Climate-Related Financial Disclosures (TCFD) regime applied back in 2021 (p.51, figure 6).
Annex 1 (p.82) contains the FCA’s mapping to SFDR Entity and Product level disclosures.
Unlike the EU-SFDR, the UK-SDR includes an explicit “labelling” regime, with financial products assigned one of three Sustainability investment labels (‘Focus’, ‘Improvers’, ‘Impact’) if they meet certain criteria.
The FCA consultation ends 25 January 2023, with final rules expected before 30 June 2023.