The Sustainable Finance Disclosure Regulation (SFDR) comes into force across the EU on 10 March 2021. Level 2 regulatory technical standards (RTS) have been drafted by the European Supervisory Authorities (ESAs), but are not expected to come into force until 1 January 2022.
On 25 February 2021, the ESA’s released a statement formally encouraging national competent authorities (such as the Central Bank of Ireland) to advise all financial market participants and financial advisors to refer to the requirements of the draft RTS when applying the SFDR’s sustainability-related disclosure provisions from 10 March 2021. While the draft RTS could still be amended between now and 1 January 2022, the ESAs have also asked the NCAs to encourage financial markets participants and financial advisors to start preparing for their application. This is perhaps unsurprising, following the European Commission's October 2020 letter to the ESAs in which it confirmed that the SFDR should come into force as planned notwithstanding the RTS delay, given the detailed high level principles on sustainability-related disclosures contained in the SFDR itself.
The draft RTS deal with the content, methodology and presentation of entity-level principal adverse impact disclosures, and product level disclosures, as follows:
- Entity-level principal adverse impact disclosures: the principal adverse impacts that investment decisions have on sustainability factors should be disclosed on the relevant financial market participant’s website. The disclosure should take the form of a statement showing how investments adversely impact indicators in relation to:
- climate and environment; and
- social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.
- Product level disclosures: all financial products marketed by financial market participants (including AIFs, UCITS funds and certain insurance-based investment products and pensions) are required to disclose whether and how sustainability risks have been considered. In the case of financial products which promote ESG characteristics or sustainable investments, additional disclosure requirements are required to be addressed in an annex to pre-contractual documentation (such as prospectuses) and periodic reporting documentation in mandatory templates and on providers’ websites. The disclosure requirements relate to:
- details as to how a product with environmental or social characteristics or a sustainable investment objective meets those characteristics or objective;
- information on the environmental or social characteristics of financial products or the sustainable investment objective of the financial product and the methodologies used for (amongst other things) calculating reference benchmarks and explaining how a reference benchmark differs from a broader market benchmark or index;
- periodic reporting as the extent to which financial products meets the environmental and/or social characteristics by means of relevant indicators (including for financial products whose objective is a reduction in carbon emissions, information as to the impact of the financial product by reference to relevant sustainability indicators); and
- information specifying the details for how sustainable investments comply with the “do not significantly harm” principle.
The SFDR is part of the wider legislative push by the EU to promote greater transparency and a consistent application of methodologies for measuring and reporting on ESG performance and sustainability objectives. While the SFDR requirements primarily relate to regulated financial products, there are also various initiatives as to sustainable finance disclosures underway in relation to unregulated products such as syndicated loans and private placements, not least because regulated financial products may be (indirectly) invested in these instruments.