16 June 2022

EU Sustainability Update

1. Summary: recent key EU-ESG disclosure events

Here is a reminder of some of the more important developments in the EU over the past few weeks:

4 May: SMSG publish response to draft ESMA MiFID II client sustainability proposals
13 May: ESAs issue latest list of SFDR/TR queries, covering specific “interpretation of Union law”.
25 May: European Commission (EC) publish Q&A document in response to ESA legal queries
31 May: ESMA present SFDR/TR supervisory statement to EEA national competent authorities (NCAs)
1 June: FinDatEx landmark European ESG template (EET 0) officially “launched”
2 June: ESAs issue a statement of clarifications regarding their draft SFDR/TR framework
14 June: EP committees reject plans to include gas and nuclear energy in EU taxonomy

NB: the CSSF today issued a reminder of the three separate sets of SFDR-related legal clarifications that recently appeared within the space of eight days. A summary of these can be found in the separate post on our website.

2. ESMA: highlight “persisting challenge” of complex SFDR

“We acknowledge that the sustainability disclosure framework is incomplete and imperfect at this time. We also accept that the disclosures to investors in the SFDR are complex by nature and difficult for especially retail investors to understand. We expect the product templates to significantly enhance comparability of disclosures when they become mandatory from next year, but the underlying complexity of the information is, and will continue to be, a persisting challenge.”

Verena Ross, ESMA Chair, IF Annual Global Funds Conference, 31 May 2022

Kneip recently co-sponsored the Irish Funds Annual Global Funds Conference in Dublin. One of the key speakers was the Chair of the European Securities and Markets Authority (ESMA).

ESMA are one of the European Supervisory Authorities (ESAs); the ESA’s co-authored regulatory technical specifications (RTS) covering the aligned Sustainable Finance Disclosure and Taxonomy regulations (SFDR/TR) were recently adopted by the European Commission (EC).

In her conference speech, Ms. Ross conceded the “persisting challenge” of an ESG disclosure framework that remains “incomplete”, “imperfect”, “complex” and “especially difficult for retail investors to understand”. With the 1 January 2023 legal application date of the SFDR/TR RTS fast approaching, she pledged ESMA would “do what they can”, given the need to “move ahead urgently with what we have”.

3. SMSG: highlight the “green-bleaching” risk of MiFID II proposals

The Securities and Markets Stakeholder Group (SMSG) acts as a facilitator between ESMA and its financial industry stakeholders. Last month, their critical assessment of the proposed SFDR update of MiFID II suitability requirements attracted significant media attention.

Firstly, the SMSG repeated their concerns about the EC’s level 1 ESG disclosure laws, including “complexity, timing and inconsistencies between different pieces of legislation” such as MiFID II. They highlighted “a risk of misalignment” between client expectations and the availability of sustainable products. They do not agree with ESMA’s current proposals to assess investor sustainability preferences, which received a largely negative response within the EU funds market.

The SMSG also cited the unintentional risk of ‘green-bleaching’, where fund managers would “invest into sustainable activities but refrain from claiming so to avoid the data problems arising from the disclosure obligations.” Furthermore, SMSG pointed out “this ‘green-bleaching’ may also be implicitly reflected in the viewpoints taken by the ESAs”; (citing the ESA’s guidance in relation to taxonomy-alignment estimates and rejection of disclaimers).

With ESMA’s MiFID II consultation results expected anytime, the SMSG suggest they conduct an “early” Call for Evidence to re-evaluate and establish “possible alternative approaches”.

4. EET: interim update

FinDatEx recently made available explanatory recordings to support their new European ESG Template (EET v1.0), recommended for delivery by product manufacturers starting from 1 June 2022.

Alongside the plentiful SFDR/TR guidance and legal clarifications now available, this should suffice for most firms to validate their interim EET mandatory disclosures, including:

Field 6: 00060_EET_Data_Reporting_SFDR_Pre_Contractual
Field 7: 00070_EET_Data_Reporting_SFDR_Periodic
Field 8: 00800_EET_Data_Reporting_SFDR_Entity_Level
Field 9: 00090_EET_Data_Reporting_MiFID
Field 25: 20020_Financial_Instrument_Name
Field 27: 20040_Financial_Instrument_SFDR_Product_Type
Field 33: 20100_Financial_Instrument_Does_This_Product_Consider_Principle_Adverse_Impact_In_Their_Investment

However, there is currently no fresh advice for those facing imminent MiFID II client sustainability assessments (i.e. following the recent SMSG critical response):

Field 82: 20590_Does_This_Financial_Instrument_Consider_End_Client_Sustainability_Preferences

5. Crucial EU-ESG events pending

At the time of writing, the European Parliament (EP) are scheduled to formally vote on 6 July 2022 to accept or reject the inclusion of gas or nuclear within the EU Taxonomy Climate Delegated Act. This must also be approved by the European Council (EUCO).

Both the EP and EUCO must also formally endorse the existing draft SFDR/TR RTS (adopted by the EC in April). Their initial scrutiny period ends also on 6 July; this is extendible by another 3 months.

In the meantime, another reminder that the EC have already mandated the ESAs to twice update their SFDR/TR RTS within the next year, covering:

Exposure of Product investments in gas and nuclear energy: due end-September 2022
Revised principal adverse impacts (PAI) indicators and de-carbonisation targets: due end-April 2023

To conclude: at this stage, it seems likely the wait for a ratified, finalised EU-ESG disclosure framework covering both entity and product levels will continue for some time. Keep watching this space.

6. Summary: key SFDR/TR milestones to follow

Q2-2022: ESMA publish results of MiFID II client sustainability preference consultation
Q2/Q3: ESMA consultation – Review of SFDR Principal Adverse Impact (PAI) indicators
6 July: EP plenary vote – EU Taxonomy including gas, nuclear energy sectors
6 July: end of initial scrutiny period for draft SFDR/TR RTS
1 August: UCITS / AIFMD sustainability risks and factors apply
2 August: MiFID II sustainability preferences apply
Q3: ESMA consultation – Guidelines on MiFID II product governance sustainability requirements
30 September: ESA’s deliver SFDR/TR RTS updates: gas and nuclear energy activities
Q4: ESMA consultation – Review of SFDR Principal Adverse Impact (PAI) indicators
22 November: MiFID II product governance disclosures sustainability factors apply
30 December: SFDR disclosures on product-level PAI consideration apply
1 January 2023: SFDR/TR disclosure rules apply (including all environmental objectives 1-6)
28 April: ESA’s deliver SFDR/TR RTS updates: PAI indicators and de-carbonisation targets
30 June 2023: Deadline for first SFDR entity-level PAI statement

NB: some of these are depicted in ESMA’s most recent Implementation timeline, published last February.