Draft SFDR RTS with Significant Change Postponed to Jan 1st, 2023

The Final Draft SFDR RTS, published on October 22nd, 2021, introduces significant changes compared to the SFDR RTS from March. The main focus is on the template structures, taxonomy-alignment calculations and disclosures as Do Not Significant Harm assessment.

Product classification

In the updated Regulatory Technical Standards, the ESAs present a clear subset for the financial products that promoteenvironmental or social characteristics (Article 8 Products) and the once that have sustainable investment as their objective (Article 9 Products). The sub-categories focus on the questions of whether the financial product makes sustainable investments, if yes – in which proportions and with what objectives. In addition, there is also a sub-category for taxonomy aligned activities with an environmental objective. These sub-categories will be clearly presented in the first section of the pre-contractual and periodic disclosure templates.

The suggested product categorisation is also consistent with the concept of “sustainability preferences” according to the MiFID II Suitability assessment rules, published in June 2021. The updated MiFID II Suitability, applicable from August 2022, requires relationship managers to explicitly ask their clients for sustainability preferences. These sustainability preferences shall be interpreted (according to MiFID II) as products which invest a minimum proportion in sustainable investments or taxonomy-aligned investments and this minimal proportion is defined by the client.

“Do no significant harm” assessment based on both SFDR and Taxonomy Regulations

In general, there are two different principles of “do no significant harm” (DNSH): one under SFDR and one under the Taxonomy Regulation.

The DNSH requirement for a sustainable investment as set out in SFDR is assessed against the principal adverse impact (PAI) indicators in Annex I of the SFDR RTS. The DNSH requirement under the Taxonomy Regulation states that in order to determine the degree of environmental sustainability of an investment, an economic activity must not significantly affect any of the environmental objectives referred to in Article 9 of the Taxonomy Regulation.

Under the updated RTS FMPs will have to apply the SFDR DNSH-assessment using the principal adverse indicators (PAI) for their taxonomy-aligned economic activities. This is a substantial change: previously the industry was hoping to just apply DNSH-assessment through the application of the Taxonomy Regulation. The new clarification confirms, both has to be performed.

Calculation of Taxonomy-aligned investments

The taxonomy-alignment of investments in non-financial companies can be calculated using one of the following key performance indicators (KPIs): Turnover, Capital Expenditure (CapEx) or Operating Expenditure (OpEx). The ESAs have proposed different approach for pre-contractual and periodic disclosures.

For precontractual disclosure the KPIs are calculated based on taxonomy-compliant activities and turnover shall be used per default for investments in non-financial companies. Alternatively, FMPs can apply capital expenditure or operational expenditure when justified by the features of the financial product. Essentially, the same KPI must be used for all investments in the pre-contractual disclosure, and it should be illustrated by a pie chart.

For periodic disclosures the extent of taxonomy-alignment shall be illustrated using each of the three KPIs (turnover, CapEx and OpEx), not just the KPI used in the pre-contractual disclosure. The KPIs will be represented in a bar chart. In addition, the following explanations shall be included 1) a breakdown of activities invested in by environmental objectives they contribute to and 2) whether the activities are enabling or transitional (requirements of the TR).

Another relevant change is the distinguishing of sovereign bonds. FMPs will have to show two sets of Taxonomy alignment disclosures:

1. One for all investments including sovereign debt and
2. One for all investments excluding sovereign debt

This change is intended to address concerns that products with high exposures to sovereigns may be viewed as having low taxonomy compliance due to the lack of a reliable methodology for determining the taxonomy adjustment for exposures to sovereigns.

The ESAs have retained the requirement for FMPs to disclose whether their taxonomy adjustment disclosures are reviewed by an auditor or other third party, and if so, they must identify the auditor or the third party.

Timeline

In a letter to the European Parliament the EU Commission wrote that they would defer the date of application of the delegated act to January 1st, 2023. cleversoft will give an update on the implications of the postponement in a webinar session for the separate target groups:

1. Insurance – register to attend
2. Banking – register to attend‍
3. Asset Management – register to attend