European Union: Sustainable finance (asset management) update: SFDR RTS adopted by the European Commission
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On April 6, 2022, the European Commission (“THIS“) has adopted the EU Regulation on Sustainable Financial Disclosure (“SFDR“) Regulatory technical standards in the form of a delegated regulation (“RTS“).
As previously announced, the EC has decided to consolidate the 13 SFDR RTS into a single delegated act, which should apply from 1 January 2023.
The RTS should provide the asset management industry and EU regulators with much-needed certainty as they prepare for compliance.
In the explanatory memorandum to the RTS, the EC expressly links the pre-contractual and periodic communication templates (Annex II-V of the RTS) to the MiFID ESG rules1which will in particular oblige investment firms and financial advisers to establish the preferences of their clients in terms of sustainable development, specifying that this information “facilitate the application of “sustainability preferences” requirements…“. It should be noted that the MiFID ESG rules will start to apply from August 2, 2022.
The following aspects of the RTS are noteworthy when compared to the latest version of the draft RTS contained in the ESA Final Report on Draft Regulatory Technical Standards dated October 22, 2021:
- The structure and format of RTS has changed considerably. According to the EC, none of the substantive requirements were changed but that they had: “…has adapted the provisions of the standards to ensure the legality and legislative quality of this regulation as well as the consistency of the rules of this regulation with the regulation on disclosures in sustainable finance“. To avoid duplication of rules in “provisions” and disclosure templates, the EC removed a number of “provisions” from the RTS. For example, most of the provisions on Article 8 and 9 SFDR pre- the contractual information of chapter III of the RTS has been deleted (the provisions on the presentation and calculation of the taxonomic alignment remain however).
- The definitions section of Chapter I has been revised. The definition “taxonomy-aligned economic activity” has been replaced by “environmentally sustainable economic activity”.
- Fortunately, the pre-contractual and periodic disclosure templates remain largely unchanged, although some notes and explanations have been revised. In Recital (29), the EC stresses once again the importance of the comparability of the main negative impact (“IAP“) and pre-contractual/periodic information and that the standard templates (including explanations of key terms in these templates) are therefore appropriate for the presentation of this information. It therefore seems unlikely that the ESAs/national regulators will allow any deviation from the models annexed to the RTS (except as permitted by the RTS).
- A new requirement has been added for financial advisors. They must explain in their PAI statement (to be published on the website) the process for selecting the financial products they advise, including how they use information published by financial market participants (such as AIF managers and UCITS management companies) and whether they rank and select financial products based on the PAI indicators as well as any PAI-based criteria or thresholds for selecting or advising on financial products.
A number of questions remain open, such as the exact scope of the taxonomy alignment pre-contractual declaration obligation for SFDR Article 8 funds promoting environmental characteristics but which do not intend to invest in sustainable investments aligned with the taxonomy as well as the application of the so-called Do No Significant Harm test and how the PAI should be taken into account in this regard. Additional guidance from the EC and/or ESAs would therefore be welcome.
The Council and the European Parliament now have three months to examine the RTS (this period can be shortened or extended).
1. Delegated Regulation (EU) 2021/1253 (MiFID II sustainability preferences)
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