ESG – Commission publishes its proposed SFDR Level 2 RTS

The European Commission has now published its proposed SFDR Level 2 Regulatory Technical Standards (RTS) to supplement the Level 1 measures which have applied since 10 March 2021. The RTS were accompanied by five draft annexes which can be found here.

We will be reviewing the RTS against the drafts submitted by the European Supervisory Authorities (ESAs) in February and October 2021 and will be publishing our detailed summary shortly.

Next steps and date of application

The proposed RTS must now be scrutinised by the European Parliament (EP) and the Council of the EU (the Council). When a final text has been agreed, it will be published in the Official Journal (OJ).

The Commission is proposing that the RTS come into effect from 1 January 2023 – although the EP and the Council have to formally agree this, it seems highly likely that they will.

Delays and timing issues under the SFDR

Getting to this stage has been a fraught process to say the least.

The Level 1 text of the SFDR was published in the OJ in December 2019 and most of its provisions have applied, as planned, since 10 March 2021.

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

For a variety of reasons, the Level 2 RTS were not finalised in time for them to apply at the same time as the Level 1 text on 10 March 2021.

After a number of postponements – first to 1 January 2022, then to 1 July 2022 - an application date of 1 January 2023 for the Level 2 RTS is now very likely.

To cover the gap between 10 March 2021 and the date on which the Level 2 measures do, eventually, come into effect:

• the Commission has indicated that it expects that firms would comply with the SFDR’s high level and principles-based requirements from 10 March 2021 and
• the ESAs have published guidance for the interim period in their Supervisory Statement – updated in March 2022 – see our article here.

What do the RTS cover? and what’s happened so far?

The ESAs were initially mandated to develop the RTS as two separate delegated regulations

• the content and format of what FMPs must disclose under the SFDR and

• taxonomy related sustainability disclosures.

  a. Content and format of disclosures

  Between April and September 2020, the ESAs held a public consultation on the content and presentation of disclosures under the SFDR. However, their draft proposals were widely criticised as being unduly onerous and complex.

  This, along with the COVID-19 pandemic, delayed the production of the ESAs' Final Report, which set out the ESAs' draft RTS, until 2 February 2021.

  b. Taxonomy related sustainability disclosures

  In March 2021, the ESAs published a consultation paper on taxonomy-related sustainability disclosures required as a result of provisions inserted in the SFDR by the Taxonomy Regulation – this closed in May 2021.

  Among other things, the consultation paper proposed amendments to the draft measures which the ESAs had submitted in their February 2021 Final Report (see above).

  This led to a second Final Report, published in October 2021, containing the ESAs’ final set of draft taxonomy related RTS.

The Commission had been expected to adopt the RTS in late 2021, and in July 2021, decided that the taxonomy related measures should be bundled together along with those on content and format into a single delegated act.

However, further delays intervened and it is only now that the Commission’s proposals have been released.