- Category: European Union Carbon Market Glossary
The SFDR Regulation stands for the Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Sustainable Finance Disclosure Regulation).
29 November 2021
Corrigendum to Commission Decision C(2021)4858 final of 6 July 2021 on the adoption of the answers to be provided to questions submitted by the European Supervisory Authorities (ESAs) under Article 16b(5) of the founding Regulations of the ESAs
ESA’s Final report on taxonomy-related product disclosure RTS with regard to the content and presentation of disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088, JC 2021 50
The draft RTS aim to:
Entry into force and implementation, transitory issues
SFDR applies from 10 March 2021 (Article 20).The exception are some of its provisions applying from 29 December 2019 and from 1 January 2022.
The transitory issues have been explained in the Joint ESA Supervisory Statement od 25 February 2021 on the application of the Sustainable Finance Disclosure Regulation (JC 2021 06) as follows:
- while financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the Regulatory Technical Standards (RTS) will be delayed to a later date;
- the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union in a letter sent to the ESAs on 20 October 2020 stated that “in terms of substance, the application of the Regulation is not conditional on the formal adoption and entry into force or application of the regulatory technical standards as it lays down at Level 1 general principles of sustainability-related disclosures”;
- in order to provide financial market participants and financial advisers with sufficient time to gather the information necessary and adjust their practices to apply the specific requirements of the RTS, and in order to provide for the alignment of the application of the RTS with the application of the amendments in Regulation (EU) 2020/852 (Taxonomy Regulation, TR) to the SFDR as well as the application of periodic reporting in the SFDR, the ESAs have proposed in their draft RTS to delay the application date of the RTS to 1 January 2022.
The said Supervisory Statement of 25 February 2021 ESAs also reads:
“For the sake of applying the provisions of the SFDR without the RTS during the interim period, national competent authorities are encouraged to refer financial market participants and financial advisers to the requirements set out in the draft RTS of the final report that has been submitted to the European Commission on 4 February 2021. The draft RTS can be used as a reference for the purposes of applying the provisions of Articles 2a, 4, 8, 9, and 10 of the SFDR in the interim period”.
Nevertheless, it is important to note that the draft RTS must still be adopted by the European Commission and that the European Parliament or the Council may object to the draft RTS within a period of three months from the date of notification of the RTS adopted by the Commission. Therefore, the final RTS may be different to the draft RTS in the ESAs’ final report.
Article 4(3) SFDR applies to financial market participants exceeding on their balance sheet dates the criterion of the average number of 500 employees during the financial year.
Article 4(4) SFDR applies to financial market participants which are parent undertakings of a large group referred to in Article 3(7) of Directive 2013/34/EU exceeding on the balance sheet date of the group, on a consolidated basis, the criterion of the average number of 500 employees during the financial year.
The Taxonomy Regulation in Article 25 empowers the ESAs, by amending the SFDR, to develop further RTS on “taxonomy-related product disclosures”.
The deadlines for the taxonomy-related product disclosures RTS range from 1 June 2021 to 1 June 2022.
Article 8, 9, 11 RTS on pre-contractual and periodic product disclosures for environmental taxonomy products are due to be delivered to the European Commission by 1 June 2021 for the “climate change mitigation” and “climate change adaptation” environmental objectives and 1 June 2022 for the “sustainable use and protection of water and marine resources”, “transition to a circular economy”, “pollution prevention and control” and “protection and restoration of biodiversity and ecosystems” environmental objectives.
Application timeline for products’ periodic reporting
Periodic reports referred to in Article 11(2) of the SFDR must comply with the requirements laid down in that Article from 1 January 2022.
The SFDR applies other sustainability-related disclosure requirements after 10 March 2021.
This means that financial market participants must draw up in 2022 respective periodic reports referred to in Article 11(2) in compliance with the SFDR, irrespective of reference periods.
For the requirements relating to those periodic reports, the draft RTS can also be used as a reference for the purposes of preparing for the application of Article 11 of the SFDR.
The ESAs proposed that the requirements of Chapter V of the RTS would only apply to periodic reports published in or after 2022 in relation to reference periods starting from 1 January 2022, while the periodic reports published in 2022 in relation to reference periods starting before 1 January 2022 would apply the high level and principle based requirements in Article 11(1) of the SFDR.
In particular, Articles 8(2a) and 9(4a) of the SFDR apply in respect of the environmental objectives referred to in points (a) and (b) of Article 9 of the Taxonomy Regulation from 1 January 2022 and in respect of the environmental objectives referred to in points (c) to (f) of Article 9 of the Taxonomy Regulation from 1 January 2023.
Under the SFDR asset managers and institutional investors will have to demonstrate how their investments are aligned with environmental, social and corporate governance (ESG) objectives and disclose how they comply with these duties.
This is accentuated in Recital 12 of the SFDR, which requires that in order to comply with their duties under those rules, financial market participants and financial advisers should integrate in their processes, including in their due diligence processes, and should assess on a continuous basis not only all relevant financial risks but also including all relevant sustainability risks that might have a relevant material negative impact on the financial return of an investment or advice.
Therefore, financial market participants and financial advisers should specify in their policies how they integrate those risks and publish those policies.
The Regulation requires financial market participants and financial advisers which provide investment advice or insurance advice with regard to insurance‐based investment products (IBIPs), regardless of the design of the financial product and the target market, to publish written policies on the integration of sustainability risks and ensure the transparency of such integration (Recital 13).
The intention of the SFDR is to introduce consistency and clarity on how institutional investors, such as asset managers, insurance companies, pension funds, or investment advisors should integrate environmental, social and governance (ESG) factors in their investment decision-making process.
Exact requirements will be further specified through delegated acts, which will be adopted by the European Commission at a later stage.
In addition, those asset managers and institutional investors would have to demonstrate how their investments are aligned with ESG objectives and disclose how they comply with these duties.
ESA’s Joint Consultation Paper of 23 April 2020 identified as a challenge that the negotiations were on-going on the draft Taxonomy Regulation while Article 2(17) SFDR defined “sustainable investments” without reference to the Taxonomy Regulation.
Principal adverse impacts (PAI)
The said ESA’s Joint Consultation Paper of 23 April 2020 observes that “while ESG products are becoming more popular in Europe, justifying common harmonised product disclosure rules, the area of principal adverse impact reporting is relatively new”.
According to Recital 8 of the SFDR “financial market participants and financial advisers should be required to disclose specific information regarding their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts”.
Recitals 18 and 20 of the SFDR read:
"Where financial market participants, taking due account of their size, the nature and scale of their activities and the types of financial products they make available, consider principal adverse impacts, whether material or likely to be material, of investment decisions on sustainability factors, they should integrate in their processes, including in their due diligence processes, the procedures for considering the principal adverse impacts alongside the relevant financial risks and relevant sustainability risks.
The information on such procedures might describe how financial market participants discharge their sustainability‐related stewardship responsibilities or other shareholder engagements.
Financial market participants should include on their websites information on those procedures and descriptions of the principal adverse impacts";
"Financial market participants which consider the principal adverse impacts of investment decisions on sustainability factors should disclose in the pre‐contractual information for each financial product, concisely in qualitative or quantitative terms, how such impacts are considered as well as a statement that information on the principal adverse impacts on sustainability factors is available in the ongoing reporting. Principal adverse impacts should be understood as those impacts of investment decisions and advice that result in negative effects on sustainability factors."