Objective and Context
On 22 October 2021, the European Supervisory Authority (ESA) published Regulatory Technical Standards (hereinafter RTS) in relation to Articles 8, 9 and 11 of Regulation 2019/2088 (hereinafter SFDR), relating to pre-contractual information and periodic reporting of products promoting environmental or social features, and products targeting sustainable investments.
The main objective of these new technical standards is to provide a single, consolidated framework for the detailed information that financial market participants and financial advisors are required to disclose in a way that harmonises market practices, provides transparency and facilitates decision-making by end-investors.
To this end, the ESA has published a draft consolidated SFDR Delegated Regulation that incorporates the changes introduced not only following the ESA’s February 2021 RTS Consultation, but also from the amendments introduced by Taxonomy Regulation 2020/852 through its Article 25 requiring the ESA to develop technical standards specifying the content and presentation of information for products that promote environmental characteristics and/or have environmental investment objectives ♻.
These final RTS of October 2021 definitively consolidate all the amendments by presenting in a single document the content, methodology and presentation of the information to be disclosed on adverse sustainability impacts at entity level, pre-contractual information, online information and periodic reporting of financial products under the SFDR framework.
The entry into force of the European Taxonomy Regulation in June 2020 meant the modification of the SFDR Regulation, not only by the incorporation of the “no significant harm” criterion, but also by the obligation for the ESA to develop these technical standards that incorporate among other issues, the need to disclose in pre-contractual information and periodic reports on which objectives of article 9 of the Taxonomy the products that promote environmentally sustainable features contribute to, as well as for financial products that have sustainable investment objectives associated with any of these objectives of the Taxonomy.
Furthermore, these RTS incorporate additional disclosure obligations on the extent to which and how investments are aligned with the Taxonomy. For institutions that have products that promote environmental features and/or environmentally sustainable investments, they must calculate two KPIs, one incorporating sovereign exposures and one excluding sovereign exposures, showing the proportion of aligned investments as a proportion of total investments, both in their pre-contractual and periodic disclosures. The form of disclosure of the degree of alignment will vary according to the type of information, pre-contractual or periodic reports using pie charts and bar charts respectively, and according to the type of entity of the exposure, non-financial and financial entities. In addition, entities are required to disclose whether compliance with the Taxonomy’s alignment criteria is audited or reviewed by an auditor or third party.
As regards the rest of the financial products and information to be disclosed beyond that related to the Taxonomy, the RTS propose certain modifications to the templates of the Annexes for the presentation of pre-contractual and periodic information. In addition, changes are made to the form, order and minor changes to the content of the sections of which the pre-contractual information, periodic reports and websites of the financial products are composed.
Date of implementation
The European Commission has informed the European Parliament of the need to delay by 6 months the implementation of these technical standards, initially planned for January 2022, due to the technical complexity of their development, as well as the need for a proper implementation by all the entities concerned through a single delegated act. Thus, the RTS will be applicable as from1 July 2022.
The final draft of the SFDR RTS confirms the trend towards the Taxonomy Regulation becoming the reference framework for defining and harmonising environmental sustainability criteria, not only in the area of financial products, which is affected by SFDR, but also in matters such as the management of customer preferences and organisational issues affected by the MiFID II regulation, among others. Furthermore, these RTS provide clarity on the information that financial institutions must disclose to the market both at the level of application of the Taxonomy, serving as a trigger for institutions to intensify the lines of action necessary for compliance.
Finally, the approval of these standards highlights the importance not only of adopting these disclosure measures from the financial sphere, but also that entities not subject to SFDR begin to disclose this information, facilitating the task of collecting information from financial institutions, which allows better access to new sources of financing and business opportunities for them.