Following the Q&A on Sustainable Finance Disclosure Regulation (SFDR) from May 25th the ESAs published a week later a paper with Clarifications on the ESAs’ draft RTS under SFDR.
The clarifications focus on the draft RTS from February 2022 and not on the Delegated Regulation from the European Commission from April 2022. Therefore, there might be some inconsistencies between the delegated RTS and this clarification paper. Still, there are some relevant points. The paper gives clarifications on the content, methodologies, and presentation of the disclosures required in the SFDR Regulation:
The relevant points covered in the paper are summarized in the article below.
1. Use of Sustainability Indicators
The ESAs clarify that the “Sustainability Indicators” referred to in Art. 11 SFDR (periodic disclosures) and Art. 10 SFDR (Web Disclosures) on the one hand side and the indicators for principal adverse impact referred to in Article 4 SFDR on the other hand side, refer to different disclosures under the SFDR. The ESAs comment that “it is possible to use the indicators for principal adverse impact to measure the environmental or social characteristics or the overall sustainable impact of the financial product, e.g. by showing improvements of the investments against those indicators over time.”
The ESAs list all three possibilities, when the PAIs can or must be used:
1. For the disclosure of Do No Significant Harm (DNSH) for sustainable investments under Art. 2(17) SFDR, Financial Market Participants must use PAIs to demonstrate that an investment qualifies as a sustainable investment. All relevant PAIs are covered in Annex 1, Tables 1, 2, 3. This point refers to the questions respectively in the periodic and pre-contractual disclosures as follows:
a. Art 8 Products: how do/did the sustainable investments that the financial product partially intends to make/made, not cause significant harm to any environmental or social sustainable investment objective?”
b. Art 9 Products: how do/did sustainable investments not cause significant harm to any environmental or social sustainable investment objective?”
2. For the disclosure of the PAI consideration under Art. 7 SFDR on a product level, FMPs must only provide the relevant information according to the periodic and pre-contractual disclosures as follows:
a. Pre-Contractual Disclosures: does this financial product consider PAI on sustainability factors? b. Periodic Disclosures: how did the financial product consider PAI on sustainability factors?
3. For the disclosure of the measurement of the attainment of environmental or social characteristics and the sustainability-related impact for Periodic Disclosures, FMPs may include PAI indicators. As mentioned above, the ESAs point out that there is no direct link between sustainability indicators and PAI indicators, but do not specify what exactly falls under sustainability indicators. The questions covering this point are respectively as follows:
a. Pre-Contractual Disclosures
I. Art 8 Disclosure: what sustainability indicators are used to measure the attainment of each of the environmental or social characteristics promoted by this financial product? // What are (…) and how does the sustainable investment contribute to such objectives?
II. Art 9 Disclosure: what sustainability indicators are used to measure the attainment of each of the sustainable investment objective of this financial product?
b. Periodic Disclosures
I. Art 8 Disclosure: How did sustainability indicators perform?” // “What were (…) and how did the sustainable investment contribute to such objectives?
II. Art 9 Disclosure: How did sustainability indicators perform?
2. PAI calculation methodology. In this section the ESAs provide some clarifications including an example on how to run the PAI-calculations based on four observations during the year (31 March, 30 June, 30 September, and 31 December). We have reviewed the formulas we have already implemented in the cleversoft SFDR Service and are happy to confirm that our formulas are in line with the additional clarifications.
3. Look-through approach and investment instrument scope for PAI disclosures. It is explicitly pointed in the paper that for the PASI Statement according to Art 4, SFDR and the respective PAI calculations all investments shall be included in the calculations: both direct and indirect investments. The ESAs list investments the following assets as an example: equity and corporate bonds, sovereign debts, private equity, supranational entities, infrastructure, and real estate.
The paper also gives a definition of direct investments “those securities issued by the investee company, e.g. listed and non-listed equities, corporate bonds, mortgage debt, covered (mortgage) bonds, private debt, asset backed securities”. Indirect investments on the other hand are defined as investments in funds such as UCITS or AIFs where applicable, funds of funds or derivatives.
A very import clarification is done regarding investee companies, where the company is a holding company, collective investment undertaking or special purpose vehicle. In this case the information about PAI “could look through to the individual underlying investments of those companies and consider the total adverse impacts arising from them”, still this is not obligatory.
In the case where a green project is being finances in the form of a green bond, a social bond or a project bond, “the assessment of the adverse impacts of the investment decisions could be limited to the adverse impacts of the project or type of project funded by the instrument”.
4. Further guidance on the adverse impact indicators in Tables 1-3 of Annex I
In this section the ESAs provide some clarifications on the concrete calculation for some of the PAIs. We have reviewed the clarifications and adjusted the formulas where necessary.
5. Guidance related to pre-contractual financial product disclosures
The ESAs clarify that the commitment about the minimum proportion of taxonomy-aligned investments should be made in the pre-contractual disclosures. In case of changes in the financial product which would trigger an update in the commitment of the minimum share of taxonomy-alignment or any other relevant indicator, it is due to the relevant sectoral legislation referred to in Article 6(3) SFDR which shall define when and how the pre-contractual disclosure should be amended during the life of the financial product.
6. Guidance related to periodic financial product disclosures
The ESAs explain that the Country Selection within the Top Holdings is not done on a look through basis. The country Selection is rather done based on “the identification of the country in which the investment is made, or the investee company is headquartered or where a financial product is domiciled”.
Another relevant topic in the industry is the generation of the first periodic disclosure and the respective reference period. The ESAs repeat that the delegated act is expected to apply from January 1st, 2023, which implies that the Level 2 SFDR requirements “should be contained in periodic reports from that date”, meaning that the first quarterly periodic disclosure shall be generated in January 2023 for the reference period Q4-2022. We will follow this topic with our clients to ensure that we meet the market standards.
Insurance companies on the contrary have to prepare the periodic reports on an annual basis. The timing of the periodic disclosures might have been defined at national level as the reference to the European Directive 2009/138/EC is done on a country level.
7. Guidance related to taxonomy-related financial product disclosures
The ESAs emphasize that the “minimum proportion” of Taxonomy-aligned investments are intended to be binding commitments in the Pre-Contractual Disclosures. They also explain that only economic activities compliant with Article 3 TR can be taken for the calculation and estimation of these indicators.
Further clarification regarding the pre-Contractual disclosures lines out that where a more representative calculation of the taxonomy-alignment is given by using capital expenditure or operating expenditure, those could be used instead in the pre-contractual disclosure. We remind that the RTS explicitly require companies to disclose Taxonomy-contribution by turnover in a first place.
In terms of Periodic Disclosures, the ESAs remind that the disclosures require a breakdown of the proportion of each of the environmental objectives set out in Article 9 TR to which the sustainable investments contributed. This means that financial products should be able to publish the contribution of its investments to 1) climate change mitigation and 2) adaptation in its periodic reports in 2023 and to the other four environmental objectives in Article 9 TR once they are applicable.
8. Guidance related to “do not significantly harm” (DNSH) disclosures
The ESAs explain in a separate point the use of the PAIs and the differentiation between the PAI consideration and the DNSH disclosures, since both require the use of the same adverse impact indicators in Annex I. Please refer to point 1, Use of PAIs.
9. Guidance related to disclosures for financial products with investment options
For multi-option products (MOPs) the ESAs clarify that the SFDR information for the underlying products is relevant and must be disclosed for the retail investor in order to make an educated decision.
Our Regulatory Watch team is closely monitoring the final development of SFDR and Taxonomy requirements before the regulatory GoLive of Level 2 requirements on January 1st, 2023. We offer standardised services on the full range of relevant SFDR disclosure requirements.
Benefit from our SFDR service with the different modules for your pre-contractual, periodic, web disclosure and PASI statement. We also offer modules covering the generation and collection of EET files.
As part of our compliance commitment towards our clients, we provide regulatory updates in due time. If you have any questions, feel free to contact us: our experts will gladly advise you on the details.