SFDR – mind the gap. ESAs publish an updated Supervisory Statement

What’s new?

On 25 March 2022, the three European Supervisory Authorities (ESAs) – ESMA, the EBA and EIOPA - updated their joint supervisory statement on the application of the SFDR (the Statement). This replaces the ESAs’ initial statement of February 2021.

The aim of the Statement is to ensure consistent application and national supervision of the SFDR across the EU, thereby creating a level playing field and protecting investors.

What does the Supervisory Statement say?

The update includes:

• a new timeline
• expectations about the explicit quantification of the product disclosures under Article 5 and 6 of the Taxonomy Regulation
• the use of estimates, and
• expectations about “principal adverse impact” disclosures made by firms from 1 January 2023.

a) Timing

The ESAs recommend that NCAs and market participants use the current period to 1 January 2023 to prepare for the application of the much anticipated Commission Delegated Regulation, which contains the SFDR Level 2 Regulatory Technical Standards (RTS) – these are now expected out in early April.

Firms should also be applying the relevant measures of SFDR and the Taxonomy Regulation in accordance with the relevant application dates outlined in the supervisory statement.

b) Disclosures under Article 5 and 6 of the Taxonomy Regulation

The ESAs note that, during the interim period, they expect disclosures under Article 5 and 6 of the Taxonomy Regulation to provide an explicit quantification, through the numerical disclosure of the percentage, of the extent to which investments underlying the financial product are taxonomy-aligned. The numerical disclosure can be accompanied by a qualitative clarification explaining how the firm addresses the determination of the proportion of taxonomy-aligned investments, for example by identifying the sources of information (see further below). Firms have struggled with data availability in relation to taxonomy-alignment disclosures for their financial products but the expectation of the ESAs is clear that, despite this, firms will need to disclose a numerical value.

c) Use of estimates

While estimates should not be used, the Statement confirms that, where information is not readily available from investee companies’ public disclosures, financial market participants can rely on "equivalent information" on taxonomy-alignment obtained directly from investee companies or from third party providers. The ESAs do not provide further guidance on this but the expectation is that such information will be “equivalent” to the public disclosures a company would be making under the Taxonomy Regulation and should not be based on estimates.

d) “Principal adverse impact”/ “PAI” disclosures made by financial market participants

The Statement confirms the approach taken by the Commission when it announced the delay to the RTS that the “derogation” under Article 4(3) of the draft RTS should no longer be available – i.e., that the first RTS compliance PAI statement made on 30 June 2023 should cover and include data/information relevant to the reference period calendar year 2022. The ESAs have also clarified that financial market participants that are considering PAI should make “non-reference period” disclosures in accordance with the RTS from 1 January 2023. This means that financial market participants will need to update their “firm-level” PAI disclosures to include the additional detail required under the RTS and are in the format as prescribed under Table 1 Annex I of the RTS by 1 January 2023.

Why has it been published?

Most of the provisions in the Level 1 text of the SFDR have applied, as planned, since 10 March 2021.

A number of supplementary Level 2 RTS measures were also needed to give more detail both on what information the various disclosures should contain and how this should be presented.

For a number of reasons, the Level 2 RTS have not yet been finalised and so could not become effective at the same time as the Level 1 text.

To cover the period between 10 March 2021 and the Level 2 RTS coming into force (at that stage, this was expected to be 1 January 2022), in February 2021, the ESAs published a Supervisory Statement, setting out guidance for firms to follow.

Delays, though, continued to hamper development of the draft RTS and the European Commission proposed pushing back their application date further, first to 1 July 2022 and, subsequently, by a letter to the European Parliament and to the Council of the EU dated 25 November 2021, by another six months to 1 January 2023.

Today’s updated Statement fills the extended gap so market participants know what is expected of them between now and 1 January 2023.

What happens next?

The Commission is expected to put forward its proposed RTS in early April.

These will then be passed to the European Parliament and the Council of the EU for their consideration and, once agreed, will be published as a Commission Delegated Regulation in the Official Journal, ready to apply from 1 January 2023