ESAs submit final report and draft RTS on disclosures under SFDR
08 February 2021 Brussels
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The joint committee of three European Supervisory Authorities (ESAs) have submitted their final report to the European Commission, including draft RTS, on the content, methodologies and presentation of disclosures under the EU regulation on the Sustainable Finance Disclosure Regulation (SFDR), ahead of the 10 March implementation date.
The joint committees made up of the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), submitted their final report and draft regulatory technical standards (RTS) on 4 February.
The proposed RTS aim to strengthen protection for end-investors by improving environmental, social and governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products.
It comes in response to investor demands for sustainable products and reduce the risk of greenwashing.
Steven Maijoor, chair of the ESAs joint committee, says the significant set of rules issued provide a strong basis to improve ESG reporting and combat greenwashing.
Maijoor explains: “They strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they will be included in documents that are very diverse in length and complexity.”
The final report takes into account the feedback received on the consultation paper that was launched on 23 April last year.
Commenting on the final report, Hari Bhambra, global head of compliance solutions at Apex Group, says the 10 March implementation date “merely represents the starting point for many when it comes to ESG data disclosure”.
Bhambra explains that the requirements on those in scope are going to increase as the legislation develops.
With the release of the RTS this week, Bhambra says: “It is clear that disclosures will need to increase in their breadth and depth for many financial market participants.”
Some of the key changes made by ESAs include an updated list of indicators for principal adverse impacts.
The indicators relate to climate and environment; and social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.
In the report, the ESAs explain that there are fewer universal mandatory indicators and more opt-in indicators. In addition, the ESAs have decided to provide separate indicators for impacts from investments in investee companies, sovereigns (and supranationals) and real estate assets.
Another amendment ESAs made in response to feedback from the consultation is the integration of the “actions taken” disclosure into the table with the principal adverse impact indicators, to give greater prominence to the engagement and other actions taken and planned by financial market participants.
While the requirements in the SFDR relating to the entity-level disclosure of principal adverse impacts apply from 10 March 2021, the additional detail specified by the entity-level ‘principal adverse sustainability impacts statement’ set out in the RTS is to be phased in.
The RTS establishes a framework of reporting on principal adverse impacts by 30 June each year with a reference period of the previous calendar year.
As the ESAs consider the RTS should apply from 1 January 2022, this means that the additional detail specified in the RTS must be reported in accordance with the RTS from that date.
However, the ESAs explain where a financial market participant publishes the principal adverse sustainability impacts statement in accordance with the RTS for the first time, the RTS does not require the disclosure of information relating to a previous reference period, meaning that the earliest information relating to a reference period to be disclosed in accordance with the RTS would not be made until 2023 in respect of a reference period relating to 2022.
The draft RTS also sets out pre-contractual disclosures details of the content and presentation of the information to be disclosed at the pre-contractual level in the sectoral documentation.
In the April consultation paper, the ESAs identified that it would be “extremely challenging” to prepare a single set of draft RTS at a pre-contractual level that can work equally well for the very different types of documents.
The ESAs explain: “Unfortunately, SFDR does not allow the development of different disclosures for different products listed in Article 2(12) SFDR as it requires the ESAs to design a single set of uniform pre-contractual disclosures for very different types of documents which serve different purposes and apply divergent approaches to pre-contractual disclosure granularity.”
According to the report, the RTS “strike a workable compromise within the very difficult constraints” of the SFDR documents listed.
The report says: “The policy approach chosen for the pre-contractual granularity of information is of minimum standardisation of requirements, which includes mandatory templates while allowing for some tailoring of the approach to specificities of financial products.”
Bhambra highlights that the key takeaway from the report is the standardisation of the disclosures — and quantification of the impact indicators — which will lead to improved and informed decision making and drive positive change.
In order to reorient capital flows towards sustainable investment, he explains: “We need to remove information asymmetries through clear, consistent and harmonious disclosures to enable informed decision making by investors.”
“We believe that this report provides useful direction that managers need on principal adverse impact, environmental or social characteristics and sustainable investment,” Bhambra adds.
Also discussing the final report, Remy Briand, head of ESG at MSCI, says with more certainty, “the industry can now take significant steps forward in terms of addressing the disclosure requirements”.
Access to quality information is the cornerstone of effective capital markets, according to Briand.
He says: “MSCI supports the European Commission's and ESAs’ endeavours to ensure market participants have a consistent set of standards which inform critical decisions within ESG investing.”
“MSCI continues to believe that ESG disclosure requirements should focus on metrics that are intuitive, readily available, financially relevant and comparable, with the aim of driving capital towards more sustainable investments,” he adds.
The commission is expected to endorse within three months of their publication.
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 RTS will be delayed to a later date, according to the commission’s letter to the ESAs.
The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.
The ESAs will also publish a consultation on taxonomy-related product disclosures under the Taxonomy Regulation.
On 9 December 2019, the SFDR was published in the Official Journal. The Taxonomy Regulation was published in the Official Journal on 22 June 2020.
The joint committees made up of the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), submitted their final report and draft regulatory technical standards (RTS) on 4 February.
The proposed RTS aim to strengthen protection for end-investors by improving environmental, social and governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products.
It comes in response to investor demands for sustainable products and reduce the risk of greenwashing.
Steven Maijoor, chair of the ESAs joint committee, says the significant set of rules issued provide a strong basis to improve ESG reporting and combat greenwashing.
Maijoor explains: “They strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they will be included in documents that are very diverse in length and complexity.”
The final report takes into account the feedback received on the consultation paper that was launched on 23 April last year.
Commenting on the final report, Hari Bhambra, global head of compliance solutions at Apex Group, says the 10 March implementation date “merely represents the starting point for many when it comes to ESG data disclosure”.
Bhambra explains that the requirements on those in scope are going to increase as the legislation develops.
With the release of the RTS this week, Bhambra says: “It is clear that disclosures will need to increase in their breadth and depth for many financial market participants.”
Some of the key changes made by ESAs include an updated list of indicators for principal adverse impacts.
The indicators relate to climate and environment; and social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.
In the report, the ESAs explain that there are fewer universal mandatory indicators and more opt-in indicators. In addition, the ESAs have decided to provide separate indicators for impacts from investments in investee companies, sovereigns (and supranationals) and real estate assets.
Another amendment ESAs made in response to feedback from the consultation is the integration of the “actions taken” disclosure into the table with the principal adverse impact indicators, to give greater prominence to the engagement and other actions taken and planned by financial market participants.
While the requirements in the SFDR relating to the entity-level disclosure of principal adverse impacts apply from 10 March 2021, the additional detail specified by the entity-level ‘principal adverse sustainability impacts statement’ set out in the RTS is to be phased in.
The RTS establishes a framework of reporting on principal adverse impacts by 30 June each year with a reference period of the previous calendar year.
As the ESAs consider the RTS should apply from 1 January 2022, this means that the additional detail specified in the RTS must be reported in accordance with the RTS from that date.
However, the ESAs explain where a financial market participant publishes the principal adverse sustainability impacts statement in accordance with the RTS for the first time, the RTS does not require the disclosure of information relating to a previous reference period, meaning that the earliest information relating to a reference period to be disclosed in accordance with the RTS would not be made until 2023 in respect of a reference period relating to 2022.
The draft RTS also sets out pre-contractual disclosures details of the content and presentation of the information to be disclosed at the pre-contractual level in the sectoral documentation.
In the April consultation paper, the ESAs identified that it would be “extremely challenging” to prepare a single set of draft RTS at a pre-contractual level that can work equally well for the very different types of documents.
The ESAs explain: “Unfortunately, SFDR does not allow the development of different disclosures for different products listed in Article 2(12) SFDR as it requires the ESAs to design a single set of uniform pre-contractual disclosures for very different types of documents which serve different purposes and apply divergent approaches to pre-contractual disclosure granularity.”
According to the report, the RTS “strike a workable compromise within the very difficult constraints” of the SFDR documents listed.
The report says: “The policy approach chosen for the pre-contractual granularity of information is of minimum standardisation of requirements, which includes mandatory templates while allowing for some tailoring of the approach to specificities of financial products.”
Bhambra highlights that the key takeaway from the report is the standardisation of the disclosures — and quantification of the impact indicators — which will lead to improved and informed decision making and drive positive change.
In order to reorient capital flows towards sustainable investment, he explains: “We need to remove information asymmetries through clear, consistent and harmonious disclosures to enable informed decision making by investors.”
“We believe that this report provides useful direction that managers need on principal adverse impact, environmental or social characteristics and sustainable investment,” Bhambra adds.
Also discussing the final report, Remy Briand, head of ESG at MSCI, says with more certainty, “the industry can now take significant steps forward in terms of addressing the disclosure requirements”.
Access to quality information is the cornerstone of effective capital markets, according to Briand.
He says: “MSCI supports the European Commission's and ESAs’ endeavours to ensure market participants have a consistent set of standards which inform critical decisions within ESG investing.”
“MSCI continues to believe that ESG disclosure requirements should focus on metrics that are intuitive, readily available, financially relevant and comparable, with the aim of driving capital towards more sustainable investments,” he adds.
The commission is expected to endorse within three months of their publication.
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 RTS will be delayed to a later date, according to the commission’s letter to the ESAs.
The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.
The ESAs will also publish a consultation on taxonomy-related product disclosures under the Taxonomy Regulation.
On 9 December 2019, the SFDR was published in the Official Journal. The Taxonomy Regulation was published in the Official Journal on 22 June 2020.
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