ESG – ESAs consult on taxonomy-related disclosures under the SFDR

The European Supervisory Authorities (ESAs) - ESMA, the EBA and EIOPA - have just published a Consultation Paper which sets out their proposed draft Regulatory Technical Standards (RTS) under the EU's Regulation on Sustainability-related Disclosures in the Financial Services Sector (SFDR).

(Although dated 15 March 2021, it was actually published two days later, on 17 March. This delay has not, though, meant any time has been lost from the - already shorter than usual - consultation period.)

The RTS concern disclosures of financial products investing in economic activities that contribute to an environmental investment objective, as defined in the Framework (or Taxonomy) Regulation.

We will be publishing a detailed note on the new consultation paper shortly and the following is intended to be no more than a high-level summary.

Why are the ESAs consulting? And on what?

The SFDR required the ESAs to submit a raft of draft Level 2 RTS to the European Commission, which cover both pre‐contractual disclosures and periodic reports.

Article 25 of the subsequent Framework Regulation amended the SFDR and added new RTS for the ESAs to develop, dealing with additional disclosure obligations for products which make use of the environmental taxonomy.

These changes included requirements for the ESAs:

• under Article 8(4) of the SFDR

  to develop additional disclosure rules on the pre-contractual information for Article 8 products using the environmental taxonomy (the so-called "light green" products, which promote environmental characteristics);

• under Article 9(6) of the SFDR

  to develop additional disclosure rules on the pre-contractual information for Article 9 products ("dark green" products, which invest in an "economic activity that contributes to an environmental objective") making use of the environmental taxonomy; and

• under Article 11(5) of the SFDR

  to develop additional disclosure rules on the periodic information for both Article 8 and Article 9 products making use of the environmental taxonomy.

In each case, these additional rules were to be divided into technical standards for (a) climate objectives and (b) other environmental objectives.

What does the consultation paper say?

The consultation paper which the ESAs have now published set out their proposals.

These aim to create a single rulebook for sustainability disclosures under the SFDR and the Framework Regulation - this would be achieved by amending the draft RTS under the SFDR in order to minimise overlapping or duplicative requirements between the two regulations.

The consultation paper includes additional taxonomy-related disclosures concerning information

• as to which environmental objectives the investments of the product contribute to; and
• about how (and to what extent) the activities funded by the product are taxonomy-aligned.

On the second limb, the ESAs' proposal consists of two elements:

• a "graphical representation of the taxonomy-alignment of investments of the financial product and a key performance indicator calculation for that alignment"; and
• a statement that the activities which the product funds and which qualify as environmentally sustainable comply with the criteria under the Framework Regulation.

The ESAs also propose to amend the templates for pre-contractual and periodic disclosures proposed in the draft RTS under the SFDR, by adding a new section that includes the disclosures required under the Framework Regulation. This would help standardise the presentation of the relevant disclosures.

Finally, the consultation paper includes a draft set of consolidated RTS under the SFDR, showing what these would look like if the current proposals are adopted - this, though, is for illustrative purposes only.

Timing

Because the ESAs have chosen to amend the RTS under the SFDR, they were unable to start work on this until the RTS were in near final form at start of 2021.

As a result, the current consultation has been delayed.

Since the RTS must be submitted to the Commission by 1 June 2021, the consultation period has been reduced from the usual three months to eight weeks, closing on 12 May 2021.

Even so, the ESAs anticipate still being able to publish a final report with draft RTS by late June or early July 2021.