SFDR: uncertainty lingers as deadline looms 03 March 2021Belgium Reporter: Alex Pugh
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With only a few days to go until the first go-live phase of the Sustainable Finance Disclosure Regulation (SFDR), securities finance market participants remain in the dark on the extent to which their businesses are in scope.
The level-one requirements of SFDR come into effect on 10 March and represent EU regulators’ first attempt at standardising environmental, social and governance (ESG) principles but it still lacks any granularity on what constitutes ESG.
Industry stakeholders are waiting on the response to a letter sent by several EU authorities to the commission seeking clarification to key terminology that defines what activities fall under the level one disclosure rules of SFDR, which will largely dictate whether lending programmes are brought in-scope of the disclosure requirements.
Steven Maijoor, chair of the European Supervisory Authorities (ESA) joint committee, penned the letter, sent in early January, to European Commission director general John Berrigan outlining several areas of ambiguity that must be resolved to facilitate an “orderly application of SFDR”.
He suggests that regulators would benefit from clarifications over areas of uncertainty voiced by stakeholders that arose during the draft regulatory technical standards consultation process.
The letter identified five key areas of uncertainty. For securities lending market participants the pertinent issue relates to the criteria of SFDR’s Article 8, which is designed to enhance transparency on products “promoting environmental or social characteristics” in pre-contractual disclosures.
The International Securities Lending Association is among those expecting the definition of ‘promoting’ to be a broad category that will likely mean securities lending is brought into the orbit of SFDR.
The second concerns alternative investment fund managers (AIFMs). Maijoor and the ESAs want to know whether the SFDR applies to registered alternative investment fund managers referred to in the Alternative Investment Fund Managers Directive as well as to non-EU AIFMs.
Thirdly, under SFDR requirements from 30 June 2021, financial market participants with more than 500 employees must publish an online statement reporting their due diligence policies relating to any adverse sustainability impacts brought about by investment decisions.
The letter seeks clarification on whether the 500 employee threshold is affected by a firm’s parent company and whether both EU and non-EU entities must be considered. Additionally, the letter asks whether the due diligence statement must include impacts of the parent undertaking only or the group as a whole?
Fourth, the ESAs want to know whether a financial product that has a reduction in carbon emissions as its objective — SFDR’s Article 9 — must only invest in sustainable investments and if not, is there a minimum share of sustainable investments required.
Also, where an EU Climate Transition Benchmark or EU Paris-aligned Benchmark comes into play, is it necessary for a product to track an EU PAB or an EU CTB on a passive basis in order for Article 9 to apply to it?
Lastly, do the disclosure requirements of the SFDR apply to portfolios or other types of tailored financial products at the level of the portfolio only or can they apply at the level of
“standardised portfolio solutions”? If disclosure requirements apply at the portfolio level, “how is it possible to maintain confidentiality obligations to the client in view of the disclosures required, especially the website disclosures required by Article 10 of the SFDR?” Maijoor asks.
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