Sustainable Finance Insight Series – 15 | ESA issues supervisory statement on the application of SFDR

On the 24 March 2022, the European Supervisory Authorities (ESAs) issued a supervisory statement with the aim of reducing the risk of divergent applications of Regulation (EU) 2019/288 on sustainability-related disclosures in the financial sector in addition to Article 5 and 6 of Regulation (EU) 2020/852.

This statement aims to cover the period between the application date (i.e. 10 March 2021) of most of the SFDR provisions and the delayed application of the Regulatory Technical Standards (“RTS”) (application date 1 January 2023). The goal is to ensure a consistent and effective supervision of the application of the SFDR in order to ensure a level playing field is provided and to enhance the protection of the investors.

Guidance for the interim period includes the following:

1. Application of most of the SFDR provisions is permissible for financial market participants and financial advisers as of the 10^th of March 2021.
2. The SFDR application is not dependant on the official adoption of the RTS as it encompasses Level 1 general principles of sustainability-related disclosures (mentioned by the European Commission).
3. The 13 RTS, which is gathered into one delegated act, are applicable from the 1^st of January 2023. This delay serves to allow participants to adapt their practises to apply the specific requirements of the RTS including all product-specific disclosures stemming from the TR. Transitional arrangements for entity-level principal adverse impact (PAI) have no longer been declared relevant by the ESAs.
4. The Taxonomy related product disclosures are still applicable for the first two environmental objectives from the 1^st of January 2022. It is also stated that an explicit quantification will need to be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy aligned. Additionally is an expectation that information on taxonomy-eligible activities should not be provided for the disclosure of the extent to which investments underlying the financial product are in taxonomy-aligned economic activities. Estimates should not be used, and if the information is not readily available from public disclosures by investee companies, financial market participants may rely on equivalent information on taxonomy alignment obtained directly from the investee company or from third party providers.
5. The numerical disclosure referenced by paragraph 6 (of first subparagraph of article 5 of the taxonomy regulation) will be accompanied by a qualitative clarification. This clarification will set out how the financial product addresses the determination of the proportion of taxonomy-aligned investments of the financial product, for example by identifying the source of information for that determination.
6. National competent authorities are currently preparing for the effective and efficient supervision of compliance by financial market participants with the relevant requirements.
7. Specific guidance for national authorities, financial market participants and financial advisors during the interim period is also needed.
8. National competent authorities are encouraged to refer financial market participants and financial advisers to apply during the interim period the draft RTS of the final reports submitted to the European Commission on 4 February and 22 October 2021 (when applying article 2a, 4,8, 9,10 and 11 of the SFDR and article 5 and 6 of the taxonomy regulation).
9. Important is to note that the draft RTS must still be adopted by the European Commission. There is still a 3-month objection period (which can be extended) for the European Parliament or the Council from the date of notification of the adoption of the Commission Delegated Regulation.
10. The ESAs recommend national competent authorities to encourage financial market participants and financial advisers to utilise the interim period to prepare for the application of the RTS.
11. An annex has also been prepared by the ESA, which covers the different timelines between the SFDR, the TR and the related RTS. A link to this annex can be found here.

Application timeline in SFDR and TR

Application timeline for entity-level principal adverse impact statement

1. The additional details as set out by the entity-level ‘principal adverse sustainability impacts statement’ set out in the RTS will be applicable from the 1st of January 2023. The RTS allows a disclosure framework of principal adverse impacts by 30th of June each year with a reference period from the previous year. As stated by the Commission, additional details specified by the RTS must be disclosed in accordance with the RTS applicable date January 1^st.
2. The first information relating to a reference period to be disclosed should be made in a statement to be published by 30^th of June 2023  in respect of a reference period corresponding to the calendar year of 2022.

 Application timeline for products’ periodic disclosure

1. Financial market participants are required to draw up in 2022 periodic reports according to their sectoral legislation listed under Article 11(2) in compliance with the SFDR, irrespective of reference periods.
2. The additional details provided by Chapter V of the RTS should be contained in periodic disclosures referenced by Article 11(2) from that date. For periodic disclosures between 1 January 2022 and 31 December 2022, the draft RTS is recommended to be used as a reference.
3. See the annex here for guidelines with regards the implementation timelines of the various disclosure obligations in SFDR & TR.