13 October 2022

Latest Sustainability Update

A) EU sustainable disclosure latest

1. ESAs raise more level 1 SFDR questions

The European Supervisory Authorities (ESAs) have raised more queries with the European Commission (EC) about their interpretation of the original 2019 Sustainable Finance Disclosure Regulation (‘level 1’).

Weeks ahead of the 1 January 2023 deadline for SFDR product disclosure (per detailed ‘level 2’ specifications), most of the latest ESA questions relate to elementary factors, e.g.

Key definitions: “sustainable investment” and “investment in an economic activity that contributes to environmental [or] social objective”
Article 9 products: directly linked with carbon emission reductions
Principal Adverse Impact (PAI): what is the meaning of PAI “consideration” at product level?

At this stage, there is no indication when the EC may respond.

Meanwhile, experts within the industry presume the EC’s clarifications may have a “significant” impact on SFDR product disclosures currently being prepared.

2. SFDR/TR RTS: gas, nuclear updates proposed

Although the SFDR level 2 disclosure rules were legally published in July, the EC had earlier asked the ESAs to apply two upgrades to their existing framework.

On 30 September, the ESAs duly delivered their first report, with amendments for financial products exposed to investment in nuclear and gas activities now aligned with the Taxonomy regulation (TR).

All product disclosure templates (per RTS Annexes II, III, IV, V) have been revised to include:

New indicators of financial products investing in fossil gas and/or nuclear energy,
Updated graphs depicting these investments (aligned with the Taxonomy, including key performance indicators).

Additional information must also be included in financial product website disclosures (per RTS Chapter IV).

NB: for fossil gas / nuclear energy investments by financial products that are not covered by the EU Taxonomy, the ESAs consider existing SFDR RTS disclosures to be “sufficient”.

The EC are now expected to endorse the draft RTS amendments within three months.

Given the current “urgency of the matter and challenging timeline”, the ESAs admit the application date of the latest changes is “beyond their control“. This is now a matter for the EC to decide.

3. ESA ‘level 3’ SFDR guidance still awaited

Back in June, the ESAs pledged to publish ‘practical application Q&As’ to “promote a better understanding” of their adopted SFDR/TR RTS throughout the funds industry, after legal publication.

With only a few weeks remaining, these have yet to appear (presumably, as a result of the critical responses now awaited from the EC).

4. FinDatEx launch EET consultation

Last Friday, FinDatEx began a quick consultation on proposed updates to their ESG template (EET V1.1) following recent market feedback. While there are no structural changes to the existing template, proposed refinements have been highlighted to respondents, with a useful explainer also available.

The consultation is open until 21 October 2022. FinDatEx intend to publish the upgraded EET template “shortly”, with a recommended transition period (i.e. EET V1 & V1.1 coexisting) until 30 April 2023.

5. NCA latest: SFDR product “fast-tracks”, etc

Ahead of the SFDR RTS disclosure deadline, recent national competent authority updates include:

Luxembourg: the CSSF publish RTS confirmation letters for UCITS, AIFs. These are required when filing prospectuses updated to include SFDR pre-contractual product disclosures (i.e. RTS annex II and III). The local “fast-track” visa stamping process remains available until 31 October 2022.
Ireland: the CBI confirm their latest SFDR disclosure “fast-track” process for UCITS, RIAFs and QIAFs. Prospectuses must be updated where indicated by the SFDR/TR RTS and filed via email no later than 1 December 2022.
Germany: BaFin publish their initial Q&A document to provide local guidance. This outlines their understanding of Article 8 product obligations, including the “promotion” of environmental / social characteristics and the assessment of Taxonomy alignment.
France: last week, the AMF issued their local SFDR/TR guidance, including a summary of Taxonomy environmental objectives and disclosure rules facing products classed per SFDR Articles 6, 8 and 9.

6. MiFID II sustainability latest

Suitability Requirements: ESMA recently published their updated guidelines for investment firms to administer client ‘sustainability’ preferences. Although relating to 2 August 2022 regime changes, these guidelines have been deferred by 6 months.
Product Governance: ESMA recently concluded a consultation on draft guidelines for manufacturers required to apply ‘sustainability’-related objectives to products facing different types of client. These relate to other regime changes (including revised MiFID target market assessment) starting from 22 November 2022. ESMA will now consider responses in their final guidance to be published during Q1 2023.

NB: so far, no additional changes to the European MiFID Template (EMT) have emerged.

EFAMA, in their response to the latest ESMA consultation, queried the “relevance” of “qualitative information that cannot be standardized and included in the EMT” to enable the comparison of ‘sustainable’ products.

7. SFDR/TR RTS: more PAI changes pending

As mentioned above, the EC previously instructed the ESAs to deliver a second set of SFDR/TR RTS amendments, to address “the main technical issues” in relation to Principal adverse impacts.

The EC require an extended list of PAI universal indicators, alongside amended definitions, methodologies, metrics and presentation rules; they also requested new rules covering decarbonisation targets and milestones. These will apply at entity and product level (i.e. website statements, pre-contractual documents and periodic reports). The ESAs have until 8 April 2023 to deliver their next package of SFDR/TR level 2 disclosure measures.

B) UK sustainable disclosure latest

1. FCA to launch UK sustainability disclosure regime this month

The Financial Conduct Authority are now expected to launch a consultation on their delayed Sustainability Disclosure Requirements (SDR) regime, before the end of October.

The FCA’s SDR Policy Statement was meant to appear in Q2 2022.

Last year’s initial discussion paper outlined a framework based on a UK Green Taxonomy, linking local investment ‘Product labels’ with simplified ‘Consumer-facing disclosures’ and more ‘Detailed Disclosures’ required at entity and product levels.

The UK Treasury have since stated the new SDR framework is now “expected for implementation by 2024”.

NB: the Fund Boards Council (FBC) are hosting an online discussion on the UK Sustainability Disclosure Requirements (including an FCA panellist) on 1 November, 2pm (UK).

2. UK Taxonomy Guidance published

Last Friday, the UK Government’s ESG experts published their advice on the local UK Green Taxonomy.

The Green Technical Advisory Group (GTAG) report is subtitled “making the EU Taxonomy fit for purpose in the UK”. They propose a “close alignment” with the EU taxonomy to “limit divergence and market fragmentation”; this will “have fewer costs and more benefits” compared to other alternative approaches.

The GTAG recommend the UK should onshore and adopt the majority of the latest EU Technical Screening Criteria (TSC) “as soon as possible”. The small subset deemed “incompatible” (e.g. linked to UK net zero strategy) need to be “urgently revised” in advance. The GTAG also suggest the UK consider an “alternative streamlined” version of the EU ‘Do no significant harm’ (DNSH) principles, as these are currently “complex to navigate”, “ambiguous” and too EU-specific.

Later this year, the GTAG will also publish further advice on specific ways to promote ‘international interoperability’ of the UK Taxonomy.

C) EU-PSF publish latest Taxonomy recommendations

This week, the Platform on Sustainable Finance (PSF) expert group published their latest 178-page report providing the EC with recommendations on EU Taxonomy data and usability.

The paper is clearly aimed at subject matter experts; however, the ‘Sustainable Finance Disclosure Regulation’ chapter (p.135-151) contains useful illustrations and practical examples.

The SFDR regime is also mentioned frequently throughout the entire report, with existing divergencies cited in relation to the TR, MIFID II, the Benchmark regulation and Insurance Distribution Directive (IDD).

The list of ‘High’ priority SFDR recommendations at this stage, include:

A greater alignment of SFDR and TR: including use of environmental, social and governance PAIs
A clearer distinction of DNSH “double-layering”: per separate TR and SFDR regimes
A simplified pre-contractual template: “tailored to client sustainability preferences”, per example provided (Appendix G, p.46).

The PSF has also published a separate 71-page report on Minimum Safeguards. This covers EU Taxonomy obligations for companies to implement procedures complying with OECD Guidelines for multinational enterprises and the UN guiding principles on business and human rights. The PSF note the SFDR “plays a special role in the context” and now advice the EC to apply five mandatory Social PAIs to this regime.