31 May 2022

Sustainable Finance Roundup

a) EU-Taxonomy status

The EU institutions continue to debate the adoption of gas and nuclear energy within their Taxonomy, as adopted by European Commission (EC).

Ahead of the European Parliament (EP) vote in Strasbourg next month, Green MEPs have prepared a resolution to veto the proposed inclusion of both industries as ‘sustainable’.  Support levels for this motion are currently unclear, with at least half the full assembly of 705 members required to vote in favour.

Separately, the European Council (EUCO) have the right to object by a reinforced qualified majority; this means at least 20 Member States must formally reject the EC’s proposals.


b) Latest: EU-SFDR/TR disclosure

The increasing sustainability disclosure workload facing the European Supervisory Authorities (ESAs) was mentioned last time around. Their draft Sustainable Finance Disclosure & Taxonomy regulations (SFDR/TR) technical framework (adopted by the EC last month) still awaits approval by both the EP and the EUCO.

During April, the EC also instructed the ESAs to make further SFDR/TR technical amendments, covering:

  • Product exposure to investments in fossil gas and nuclear energy activities
  • Principal adverse impacts (PAI) indicators and product de-carbonisation transparency

On 16 May, the ESAs issued their latest list of SFDR/TR queries, covering specific “interpretation of Union law”.  Last week, they quickly received a detailed 11page Q&A response from the EC. Key clarification areas include:


  • PAI disclosures

The EC confirm that firms below entity-level PAI threshold can manufacture a financial product that “pursues a reduction of negative externalities” caused by underlying investments (i.e. if they follow the stated disclosure rules). NB: MiFID II firms are likely to welcome this EC guidance, ahead of SFDR client sustainability preference rules, applicable from 2 August 2022.


  • SFDR/TR product disclosure rules

In their most detailed feedback (p.9-11): the EC state the purpose of the EU-Taxonomy product transparency rules is to “incentivise behavioural change in the whole value chain, including delivery of sound information on sustainability performance on underlying investments”. The EC also clarify:

  • Transparency of products promoting environmental characteristics (TR art.6): disclosure rules apply directly to all SFDR art. 8 products regardless of whether they invest in sustainable economic activities (this is deemed to be “irrelevant” by the EC).
  • Transparency of environmentally sustainable investments (TR art.5): this applies also to SFDR art. 9 products with a social objective, where they invest in activities that contribute to an environmental objective.
  • Data use: Unless firms use “reliable data” in their disclosure of art.5 / art. 6 TR product information, they will risk legal infringement, incurring liability and contractual voidance under EU and national law.
  • ‘Zero indication’: where firms fail to collect data on the relevant TR environmental objectives (incl. substantive contributions and do no significant harm criteria), they must ‘indicate zero’.
  • Narrative explanations: the EC state these “risk contradicting the purpose” of the TR itself; where used by a firm, clarifications must not “leave room for ambiguity” in terms of the product sustainable investment alignment; the EC prohibit “negative justifications”, including those “explaining a lack of the alignment by a lack of data”.


Ongoing, these latest EC legal responses will influence all EU stakeholders in relation to:

  • Level 1 “principles-based” disclosure: applicable for entities and products since 10 March 2021 (SFDR only) and 1 January 2022 (TR-environmental objectives)
  • Level 2 “rules-based” disclosure: pending 1 January 2023 (based on the ESA’s finalised SFDR/TR RTS).


c) ESMA: publish new SFDR briefing and ESG cost/performance reports

Today, ESMA issued a new SFDR/TR supervisory briefing covering sustainability risks and disclosures in the area of investment management.  Previously flagged in ESMA’s Sustainable Finance Roadmap [202224], this guidance document seeks to “ensure convergence” in the supervision of “sustainable” products and “combat greenwashing” across the EU.  Key content includes:

Guidance for the supervision of fund documentation and marketing material This covers ESMA’s interim expectations in relation to SFDR / TR disclosures:

  • Compliance of the pre-contractual disclosures
  • Consistency of information in the fund documentation and marketing material
  • Verification of the compliance with the website and periodic disclosures obligations

Integration of sustainability risks by AIFMs and UCITS managers

This clarifies the SFDR sustainability risk and factors to apply in both regimes from 1 August 2022.

Regulatory interventions in case of breaches

This summarises supervisory and investigative powers now available to national competent authorities (NCAs) across the EEA.

On 23 May, ESMA also published a risk analysis study called ‘The drivers of the costs and performance of ESG funds’. This highlights the cost and performance dynamics of ESG products (compared to other funds) between April 2019 and September 2021. They conclude “ESG funds remain statistically cheaper and better performing than non-ESG peers.”


d) Morningstar: market trends, EET update

Morningstar’s sustainability-related data and analysis continues to attract notable media attention.

Their latest quarterly review of SFDR products (Q1-2022) concludes:

  • 8 products with ESG characteristics (‘light green’): EUR 3.3 billion outflow
  • 9 products with sustainable investment objective (‘dark green’): EUR 8.6 billion inflow
  • 8 + art.9 products total AUM: EUR 4.2 trillion [+8.5%]
  • 8 + art.9 products: 45.6% of EU funds universe [+3.2%]

They also presented their latest top 30 list of sustainable asset managers.

Separately, the recent  Morningstar regulatory reporting update (available on replay) covered the European ESG template (EET) in detail. Results of their EET fund firm survey included:

  • 8% of fund firms: have produced an EET
  • 54% of fund firms: will produce an EET before 1 June 2022
  • 28% of fund firms: remain undecided
  • 2% of fund firms: will not produce an EET
  • 33% of fund firms: will disclose all their products (incl. those outside SFDR)
  • 39% of fund firms: remain undecided about which products they will disclose


NB: Kneip stand ready for the new EET on 1 June 2022 and received a prominent name-check during this webinar: “Morningstar have now received EETs from Asset managers and third-party distribution channels, such as Kneip. These have now been tested and passed through our system.”


e) UK: SDR withdrawn at “last-minute”

Finally, for now: over in London, the UK Government have quietly withdrawn the long-awaited Sustainability Disclosure Requirements (SDR) regime.

SDR was originally unveiled by the UK ahead of their UN COP26 climate conference in November 2021.

Following a “lastminute Uturn reported by the Financial Times, SDR was removed from the Queen’s speech that outlines the next UK parliamentary legislative programme.  The FT quote the UK Treasury saying they “remain committed to implementing sustainability disclosure requirement and will proceed with the necessary legislation in due course”.

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