Simmons & Simmons SFDR resources

For asset managers, the Sustainable Finance Disclosures Regulation (SFDR) is, perhaps, the most relevant element of the EU’s initiative to make environmental, social and governance (ESG) concerns a central pillar of financial services regulation.

It requires financial market participants (ie AIFMs, UCITS Managers and MiFID firms which provide the service of portfolio management) to make pre-contractual, website and periodic disclosures about how they integrate sustainability risks in their investment decision making process and advisory processes. Exactly what information needs to be disclosed, and how, is largely determined by the Level 2 regulatory technical standards (RTS) published by the European Supervisory Authorities (the ESAs).

The SFDR’s main provisions came into effect on 10 March 2021, complemented by Level 2 RTS contained in the Commission Delegated Regulation (EU) 2022/1288 (as amended) from January 2023.

Simmons & Simmons has produced the following notes on SFDR with asset managers specifically in mind:

General

1. ESG – Simmons client note on the Commission’s SFDR consultation paper (September 2023)

On 14 September 2023, the European Commission published two consultation papers on the functioning and future of the SFDR - the first step in a process which will eventually lead to significant amendments being made to the current SFDR regime.

Both publications deal with issues around the implementation of the SFDR since its introduction in March 2021 and raise the prospect that they may lead, in time, to changes which apply the same ESG disclosure obligations to all funds sold in the EU given industry concerns on the costs and difficulty of compliance with the current regime.

Our client note, "SFDR 2 - significant new policy direction revealed", provides a summary of the following top 10 things that firms need to know about the consultation:

1. What is covered in the consultation?
2. Do firms need to take action in response to the consultation?
3. What are the options for SFDR 2 to replace article 8/9 with product labels?
4. What is Approach 1 to product labels?
5. How is Approach 1 similar to the UK Sustainability Disclosure Requirements (SDR) proposals?
6. What is Approach 2 to product labels?
7. What does the Commission ask about the current SFDR regime?
8. How does the Commission approach SFDR's alignment with other EU regimes?
9. What changes are proposed to entity-level disclosures?
10. What changes are proposed to product-level disclosures?

2. ESG: The ESAs’ amendments to the SFDR RTS – a client note (April 2023)

On 12 April 2023, the three ESAs (the EBA, ESMA and EIOPA), jointly published a consultation paper, "Review of SFDR Delegated Regulation regarding PAI and financial product disclosures" (the CP).

The CP proposed material changes to the existing disclosures required under the SFDR RTS, which came into force on 1 January 2023.

The proposed changes include revising the principal adverse impact (PAI) indicators, new decarbonisation disclosures, enhanced “Do No Significant Harm” (DNSH) disclosures, and broader amendments to the article 8/9 disclosure templates.

Firms subject to SFDR – and, in particular, to the regimes covered by the RTS – will need to engage with these proposals and their likely practical impact.

Our client note provides our summary of the Top 10 things that firms need to know about the CP:

1. What is covered in the CP?
2. Which firms would be subject to the changes proposed in the CP?
3. What changes are proposed to the PAI regime?
4. How does the CP approach mandatory decarbonisation disclosures?
5. What changes are proposed to the DNSH regime?
6. Will there be further changes to the Article 8 / 9 mandatory disclosure templates?
7. What does the paper say about derivatives and about short positions in calculations?
8. What other changes are proposed?
9. What does the CP not cover?
10. What are the next steps and when would this come into force?

3. Commission’s new Q&As on interpreting the SFDR – a client note (April 2023)

On 14 April 2023, the European Commission published its responses to a number of questions raised by the ESAs on interpreting the SFDR. Our summary of these questions can be found here.

The eight questions, submitted by the ESAs in September 2022, represented the most significant remaining “known unknows” in relation to the SFDR – i.e. key interpretative questions which had not yet been formally answered by EU regulators.

Our client note summarises the Commission’s responses and provides our high-level reaction to them, focussing on the following:

• The definition of “sustainable investments”
• “Consideration” of PAI
• Article 9(3) products
• Periodic reports for portfolio management services

4. ESG – client note on important SFDR Q&As published by ESMA (November 2022)

On 17 November 2022, ESMA published an extensive set of new Questions & Answers (Q&A) in respect of the SFDR and RTS. We published a briefing note on the Q&A, which summarises the big picture scoping questions and the key interpretative questions.

The Q&A was immediately effective – there was no implementation or transitional period. It is applicable to all firms subject to SFDR (although some parts of the Q&A may not in practice be relevant).

A firm which is subject to any of the in-scope regimes will need to engage closely with the Q&A, and update its approach to SFDR if there is any material divergence between the firm's current viewpoint and the guidance in the Q&A.

While the Q&A ostensibly relates to the RTS, several of the questions relate to the SFDR Level 1 regulation and the Taxonomy. The primary focus areas are:

• the PAI disclosure regime (under Article 4 SFDR, and Part II and Annex I of the RTS)
• the Taxonomy alignment calculation (under articles 15 and 17 of the RTS)
• pre-contractual and periodic disclosures for Article 8/9 products (under Annexes II to V of the RTS)
• certain other SFDR scoping and application points.

5. ESG: Commission Q&A on SFDR published (May 2022)

On 10 December 2021 (though not published until 13 May 2022), the ESAs submitted a number of questions to the European Commission, seeking important clarification on certain key open questions on how to interpret aspects of the SFDR and the Taxonomy Regulation.

The Commission published a Q&A document (dated 17 May 2022 but published on 25 May 2022) in response to these questions.

Our client note sets out a summary of the new guidance as relevant to firms subject to SFDR along with our comments on this.

The questions can be grouped into four broad themes:

1. Product-level compliance with the PAI regime in situations where the manager does not comply with entity-level PAI
2. How SFDR disclosure requirements apply to pre-existing open and closed products
3. Good governance requirements for article 8/9 products
4. How the Taxonomy-alignment disclosures apply to article 8/9 products which don't actively pursue environmental objectives

On 13 September 2022, the ESAs published a further eight questions on the interpretation of aspects of the SFDR, which they submitted to the European Commission on 9 September 2022.

We have published a separate client note providing a summary and our high-level reaction to (i) the questions, and (ii) the Commission’s responses.

6. ESG – new Simmons client note on the SFDR RTS (April 2022)

On 6 April 2022, the European Commission published its proposed Level 2 RTS under both the SFDR and the Taxonomy. The RTS were accompanied by five draft annexes, which provide mandatory disclosure templates.

Our detailed client note can be found here.

In it, we consider what changes the Commission’s proposed RTS make to the draft versions developed by the European Supervisory Authorities in April 2020, February 2021 and October 2021 in respect of the following key issues:

• how to define an article 8 or an article 9 product
• the meaning of “sustainable investment” under SFDR
• pre-contractual disclosure for article 8 / 9 products
• taxonomy disclosure for article 8 / 9 products
• website disclosure for article 8 / 9 products
• periodic disclosure for article 8 / 9 products
• the PAI regime – disclosure requirements
• the PAI regime – PAI indicators and metrics

7. SFDR – Key points and implications of the Commission’s Q&As (July 2021)

On 26 July 2021, the European Commission published a set of questions and answers on SFDR in response to a number of issues of interpretation which had been raised by the ESAs.

Our client briefing note looks at the Commission's answers and their implications for asset managers, covering the following broad issues:

• the application of SFDR to:
  • registered (sub-threshold) AIFMs; and
  • non-EU AIFMs marketing an ESG fund in the EU under an NPPR.
• how the SFDR applies in respect of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group;
• the application of Article 9 of SFDR;
• the meaning of "promotion" in the context of products promoting environmental or social characteristics; and
• the application of SFDR product rules to portfolios and dedicated funds.

8. The SFDR – Key requirements (last updated June 2020)

Our note looks at three key themes of the SFDR according to their likely commercial impact for asset managers and examines, in turn, the rules which apply (a) at the level of the asset management firm, (b) to all financial products made available by an asset management firm (whether or not the product has an express ESG focus) and (c) only to financial products which have an express ESG focus.
We also summarise the elements of the Taxonomy Regulation which have a direct relevance to the SFDR.

Level 2 issues

9. ESG - client note ‘Top 10 talking points from the ESAs’ SFDR proposals’ (December 2023)

On 4 December 2023, following a comprehensive review of the RTS, the ESAs published a Final Report containing draft RTS.

Our client note summarises the Top 10 things that firms need to know about the Final Report.

The Final Report

• proposes material changes to the disclosures required under the existing SFDR RTS, which came into force on 1 January 2023, including: (i) the addition and the revisions of some PAI indicators, (ii) new decarbonisation disclosures, (iii) enhanced DNSH disclosures, (iv) broader amendments to the Article 8 and 9 disclosure templates and (v) other technical adjustments.
• includes major changes to the RTS, which many are calling SFDR 1.5.

As the European Commission is likely to endorse the ESAs' draft measures, firms subject to the SFDR – and, in particular, to the regimes covered by the RTS – will need to engage closely with the new rules and their practical impact from now on.

Our client note examines the following key questions:

1. What is covered in the Final Report?
2. Which firms would be subject to the changes proposed in the Final Report?
3. The PAI regime
4. Amendments to the decarbonisation targets
5. DNSH disclosure
6. Simplification of the Articles 8 / 9 templates
7. Other technical adjustments
8. Financial products with investment options
9. ESAs open questions to the European Commission addressed in Final Report
10. What are the next steps and when would this come into force?

The RTS are still to be adopted by the Commission and, having been reviewed and approved by the European Parliament and the Council of the EU will be published in the Official Journal. It is unclear as yet when the new provisions are likely to become effective.

10. SFDR – Regulatory Technical Standards published Top 10 things that asset managers need to know (February 2021)

On 4 February 2021, the ESAs published updated draft RTS.

These set out technical detail on how in-scope firms must comply with the SFDR’s disclosure obligations, replacing (and partially rectifying) the draft RTS on which the ESAs consulted in April 2020 (see below), particularly relating to the principal adverse impact (PAI) regime.

Some questions, though, remain unresolved or unaddressed, and we draw these out in our client note, looking, in turn, at (a) Scope and purpose, (b) PAI - disclosure regime and (c) Article 8 and 9 product disclosures

11. Top ten things asset managers need to know about the Level 2 proposals under the SFDR (last updated June 2020)

In April 2020, the ESAs set out proposals for Level 2 RTS; these were significantly more onerous than the industry had been expecting and would represent a very significant undertaking for in-scope firms.

Our note summarises the top ten issues which asset managers need to know about the RTS, including an overview of the areas covered by the RTS, what were the proposed quantitative and quantitative disclosures for measuring adverse sustainability impacts and what product level disclosures were proposed for ESG focussed products.

SFDR outside the EU

12. What's the impact if the UK does not implement SFDR? (October 2020)

Our note looks at the legal position surrounding whether and how SFDR could become part of UK law, and summarises the consequences for UK firms (who may currently be assuming that SFDR will directly apply to them) should SFDR not become UK law, with several practical scenarios to illustrate how SFDR could still be relevant for UK firms (particularly those doing certain types of cross-border business into the EU).

13. European ESG rules: SFDR Key actions for non-EU managers by 10 March 2021 (November 2020)

Ahead of the application of the SFDR in the EU from 10 March 2021, our note answers certain key questions on why non-EU EU managers may need to comply with these rules.