SFDR RTS - the ESAs’ draft changes for natural gas and nuclear

In July this year, the Level 2 RTS made under SFDR were finally published in the Official Journal (OJ).

These had been a long time in the making – Level 1, after all, has been in force for over 18 months – and their development seemed to be an endless round of comment, criticism and concern. But at least they were finally out!

And now they’re being changed…

In overview

The proposed amendments will require article 8 SFDR products and article 9 SFDR products to make an additional Taxonomy-alignment disclosure, relating to investments in Taxonomy-aligned fossil gas or nuclear investments. These disclosures would be contained in their RTS-compliant pre-contractual disclosures and periodic disclosures. The relevant templates in the RTS would be amended to reflect the additional disclosure requirements.

We understand this to be a sub-set of the existing Taxonomy-alignment disclosures under the RTS, and which would apply only to financial products which are required to make Taxonomy-alignment disclosures under the RTS as it stands today. Consequently, financial products which do not make Taxonomy-alignment disclosures (e.g. “Article 6” products, or Article 8 / 9 products not subject to Taxonomy disclosures), would not have to make any additional disclosures.

The timing for these changes is not mandated in the ESAs’ document. But, it seems possible that the Commission may require the changes to come into effect as soon as 1 January 2023. This would cause significant practical difficulties for firms preparing SFDR disclosures ahead of the RTS deadline of 1 January 2023, particularly for firms which must submit updated RTS-compliant documents to regulators – for example to the Luxembourg CSSF by 31 October 2022, or to the Central Bank of Ireland by 1 December 2022.

Why?

Another piece of EU ESG legislation which had an eventful birth was the Delegated Regulation (the so-called Complementary Delegated Act, or CDA) made under the Taxonomy Regulation.

This dealt with the issue of the treatment of fossil gas and nuclear energy activities within the EU’s taxonomy and, after some highly critical responses to the European Commission’s proposal, the CDA was published in the OJ. The CDA allows certain fossil gas and nuclear investments to be treated as environmentally sustainable under the Taxonomy, provided that certain conditions are met.

The CDA would require consequential changes to aspects of the SFDR RTS.

As a result, in April, the Commission invited the Joint Committee of the European Supervisory Authorities (ESAs) to develop draft amendments to the SFDR RTS in relation to the information that should be provided in pre-contractual documents, on websites, and in periodic reports about a product’s exposure to investments in fossil gas and nuclear energy activities.

The ESAs’ Final Report containing these amendments was published on 30 September 2022.

What’s being proposed?

A redline document, which sets out how the SFDR RTS and Annexes would look if the ESAs’ proposals are adopted unchanged, can be found here.

The ESAs’ draft sets out amended content requirements which an article 8 SFDR or article 9 SFDR financial product must include

• in the section entitled, ‘To what minimum extent are sustainable investments with an environmental objective aligned with the EU Taxonomy? (see the templates at Annex II and Annex III below) – these amendments would change Article 15 of the existing RTS
• in the section entitled, ‘What was the proportion of sustainability-related investments?’ (see the templates at Annex IV and Annex V) – these amendments would change Article 55 of the existing RTS

Note that the ESAs concluded that no amendments are required to the website disclosure requirements under the SFDR RTS.

In addition, the proposals clear up a couple of typos – the periodic disclosures in Article 55 and Article 62 of the existing RTS refer to Article 15(1) and Article 15(2)(b) respectively. These should both, instead, refer to Article 15(3).

These proposals have consequential effect by amending the relevant sections of

• Annex II (pre-contractual disclosures for Article 8 products)
• Annex III (pre-contractual disclosures for Article 9 products)
• Annex IV (periodic disclosures for Article 8 products) and
• Annex V (periodic disclosures for Article 9 products).

What happens next?

The SFDR RTS and the CDA will both apply from 1 January 2023. The ESAs’ proposals now need to be adopted by the Commission and scrutinised by the European Parliament and Council of the EU.

As the timing is both extremely tight and outside the control of the ESAs, the Final Report leaves it to the Commission to decide on the proposed application date for the changes being made to the SFDR RTS. However, it seems implicit from the ESAs’ Final Report that the Commission may still be aiming for the ESAs' proposed changes to apply from 1 January 2023.

An application date of 1 January 2023 may cause significant practical difficulties for firms which are preparing RTS-compliant pre-contractual disclosures, as many firms are working to internal or external deadlines significantly ahead of 1 January 2023.

In relation to external deadlines, many firms are also subject to the CSSF’s deadline of 31 October 2022, or the CBI’s deadline of 1 December 2022, to submit updated RTS-compliant fund documents to those regulators. It is unclear how the implementation of these amendments would interact with those requirements.