I. Background
Despite Level 1 of the Sustainable Finance Disclosure Regulation (SFDR) being applicable for over a year, the Level 2 requirements, set out in the draft Regulatory Technical Standards (RTS) are expected to be applicable on 1 January 2023.
During the interim period prior the RTS, the application of the SFDR by the relevant investment fund managers (IFMs) is subject to divergences amongst EU jurisdictions. In that context, the European Supervisory Authorities (ESAs) published on 24 March 2022[1] (the Supervisory Statement), with the aim of achieving an effective and consistent application and supervision of the SFDR throughout the European Union.
II. Key takeaways
The delay of the application of the RTS raised some uncertainties for IFMs, notably on (i) how to implement the EU Taxonomy Regulation (TR) provisions as of 1 January 2022, (ii) the reliance on the draft RTS and (iii) the timing of the reporting requirements under the SFDR.
Disclosure of the taxonomy-alignment as of 1 January 2022
In the latest draft RTS dated 22 October 2021[2], the IFMs managing Article 8 and Article 9 funds are required to disclose the proportion of investments which are taxonomy-aligned, in the form of a diagram with the relevant explanations. In the Supervisory Statement, the ESAs clarify that, before the application date of the RTS, it is expected from the IFMs to provide an explicit quantification of the alignment of underlying investments with the TR, through the disclosure of a percentage of the extent to which the investments are taxonomy-aligned.
To disclose the proportion of taxonomy-alignment, IFMs are usually facing the limited accuracy of the data publicly available in the market. The Supervisory Statement clarifies that, where accurate data from public disclosures of the investee companies is not available, the IFMs may obtain equivalent information directly from the investee companies or third-party providers. In addition, the quantitative disclosure could be accompanied by a qualitative clarification explaining how the determination of the proportion of the taxonomy-alignment of investments is addressed, notably by indicating the sources of information relevant for that determination.
Reference to the draft RTS, in line with the CSSF recommendation
During the interim period, the ESAs invite the national competent authorities to refer IFMs to the requirements set out in the latest version of the draft RTS published on 22 October 2021, containing the draft RTS originally submitted on 4 February 2021. The ESAs also recommend encouraging IFMs to use the interim period (i.e., prior to 1 January 2023) to prepare for the application of the RTS.
This encouragement is in line with the recommendation issued on 2 December 2021[3] by the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) on the communication related to the implementation of the taxonomy-related requirements as of 1 January 2022.
Timeline of the reporting requirements under the SFDR
Under the SFDR and the current draft RTS, the principal adverse sustainability impact statements should apply as of 1 January 2023. By 30 June of every year, the IFMs which declare that they consider principal adverse impacts (PAI) of their investment decisions, must product a PAI statement with respect to the previous financial year.
As the first PAI statement is required to be published by 30 June 2023, the ESAs confirm that the first PAI reporting period started on 1 January 2022.
The Supervisory Statement further explains that the requirements on periodic disclosures of Article 8 and Article 9 products are applicable as of 1 January 2022. In that respect, the draft RTS should be used as a reference for the periodic disclosures issued between 1 January 2022 and 31 December 2022.
III. Conclusion
The Supervisory Statement clarifies some uncertainties that IFMs have been facing with the application of the SFDR and TR disclosure requirements in the interim period, prior the application of the long-awaited RTS.
While such Supervisory Statement will undoubtedly contribute to some alignment between national competent authorities in the supervision of the application of the SFDR and TR by European IFMs, the implementation of the sustainability-related disclosure requirements is a long process requiring efforts from all market participants and will most certainly remain a work in progress for some time.
