On 25 February the Joint Committed of the European Supervisory Authorities (“ESAs”) issued a Supervisory Statement regarding its concerns in the divergent application of EU Regulation 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”) and its delayed level 2 Regulatory Technical Standards (“RTS”).
The stated objective of the statement is “to achieve an effective and consistent application and national supervision of the SFDR, promoting a level playing field and the protection of investors”. However, one could argue that it also attempts to set a concerning precedent.
SFDR was published at the end of 2019 and is part of the European Commission’s Sustainable Finance Action Plan, one of the main objectives of which is to reorient capital flows towards sustainable investments. SFDR therefore lays down harmonised sustainability disclosure obligations for financial market participants and financial advisers operating through the European Union, in order to enable investors to make better decisions on their investments.
While the financial services industry has had to adapt to the challenges of the COVID-19 pandemic, the European legislative and oversight bodies delayed the application of certain rules and regulations, but not in the case of SFDR. As such, its initial compliance deadline of 10 March 2021 has remained.
The issue, as we know, is that the RTS were delayed from the slated deadline of 31 December 2020 and have not yet been adopted. The latest version published by the Joint Committed of ESAs on 2 February remains a draft and are yet to be adopted by the European Commission; they could also be objected to by the European Parliament or Council.
> ESA Supervisory Statement
The extent of application of SFDR should not be underestimated, and financial market participants that opt-in* to the full scope of the SFDR are faced with a significant change to their compliance and investment processes to comply with its requirements.
The Commission has stated that: “in terms of substance, the application of the SFDR is not conditional on the formal adoption and entry into force or application of the [RTS] as it lays down at Level 1 general principles of sustainability related disclosures”.
The ESAs have proposed for the application of the draft RTS to be delayed to 1 January 2022, but we are now in a position where financial market participants are being “encouraged” to comply with a draft RTS because the process has been delayed. The specific statement being that: “national competent authorities are encouraged to refer financial market participants and financial advisers to the requirements set out in the draft RTS of the final report that has been submitted to the European Commission on 4 February 2021.”
Given the risk of further delays or changes to the RTS, this sets a dangerous precedent for the industry. While it could simply be due to a slightly fanatical approach to the implementation of the Commission’s Sustainable Finance Action Plan, it’s something that we should nonetheless be mindful of.*
> RTS Application for Product Reporting and Summary Table
The Supervisory Statement highlights the applicability of the entity-level “principal adverse sustainability impacts statement” reporting and product periodic reporting. Both have a potential application date from 1 January 2022, but in the case of product reporting, it has been highlighted that this would be particularly burdensome if there isn’t a period of at least six months from adoption of the RTS to allow financial market participants to gather the necessary data and adapt their practices.
Ending on a positive note, the Supervisory Statement includes a very useful Summary table of SFDR and TR disclosure obligations on financial market participants, financial advisers and financial products, which breaks SFDR down by article, summarises the requirement, any RTS application and relevant application dates.
Should you need any assistance regarding any aspect of SFDR, the RTS or the EU’s other sustainable finance initiatives, please contact Wildgen’s Investment Funds Practice Group.