The (unfinished) SFDR enters into effect – where do we stand now in terms of ESG disclosure?

A first set of transparency requirements of the Sustainability Finance Disclosure Regulation (Regulation (EU) 2019/2088 or 'SFDR') will enter into force on 10 March 2021. The SFDR puts forward sustainability-related disclosure requirements for financial market participants and financial advisors for the benefit of investors on an entity and product level. It is a cornerstone of the EU’s aspirations to reform the financial system so that it can “be part of the solution towards a greener and more sustainable economy”.

The SFDR applies to a broadly defined range of financial market participants and financial advisors and the financial products they offer. It covers the investment sector (UCITS management companies and alternative investment fund managers) but also credit institutions and investment firms (if they provide portfolio management or investment advice) as well as the insurance/pension funds sector. As a result of this broad scope of application, investment funds (eg UCITS, AIFs), managed portfolios, pension funds and certain other investment products will become subject to the requirements of the SFDR.

On 10 March 2021, the following disclosure requirements will come into force:

On their website:

• Information on sustainability risk policies (Art.3)
• Consideration of adverse sustainability impacts at entity level (Art.4(1))
• Information on how sustainability risks are integrated in remuneration policies (Art.5)
• Additional disclosure for financial products that promote environmental or social characteristics (cf. Art.8) or that have sustainable investment as their objective (cf. Arts 9 and 10)
• Financial market participants and financial advisors must keep the information pursuant to Arts 3, 5 and 10 up to date (Art. 12)

In pre‐contractual disclosures:

• Information on the integration of sustainability risk in investment decisions or advice (Art.6)
• Consideration of adverse sustainability impacts at product level (Art.7)
• Additional disclosure for financial products that promote environmental or social characteristics of how these characteristics are met (Art.8)
• Additional disclosure for financial products that have sustainable investment as their objective of how this objective is attained (Art.9)

Furthermore, marketing communications must not contradict the information that is disclosed under the SFDR (Art.13).

The SFDR requires the adoption of Regulatory Technical Standards (RTS) by the Commission that set out details for certain transparency requirements (Arts 4, 8, 9, 10 and 11 SFDR) until the end of 2020. However, the Final Report and Draft RTS were submitted to the Commission by the ESAs only in February 2021 (JC/2021/03) and have not been adopted yet. In October 2020, the Commission indicated that the RTS would be delayed because of the COVID-19 pandemic and enter into force later than the 'principle based requirements' of the SFDR itself (Letter(2020)5678036). The ESAs suggested to delay the application of the RTS, once adopted, until 1 January 2022 in order to give financial market participants time to prepare themselves for the RTS (JC/2021/06). For the interim period, the ESAs encouraged national competent authorities to refer obliged entities to the requirements set out in the draft RTS.

In addition, the ESAs have recently sought clarity on certain 'priority issues' around the application of the SFDR (JC/2021/02) that were raised by stakeholders. The questions raised by the ESAs include, inter alia, the application of the SFDR to registered ('sub-threshold') AIFMs or to non-EU AIFMs that market under national private placement regimes and the meaning of “promoting” environmental or social characteristics in the context of Art.8 SFDR. The Commission has not yet answered the ESA’s request.

For financial market participants and financial advisors that have generally been prepared for the 10 March 2021 deadline, this means a significant level of legal uncertainty. It would appear reasonable if national competent authorities granted broad discretion when assessing the obliged entities' compliance with the SFDR, even where they do not apply the draft RTS (in their entirety).

Ongoing compliance with the SFDR will also require close monitoring and further adjustments to legal developments. This does not only include compliance with the (potentially subject to change) RTS when they enter into force but also those SFDR requirements which will enter into force at a later stage. The ESAs have provided a detailed summary table of all SFDR disclosure obligations in their supervisory statement (JC/2021/06). In addition, the ESAs have also already announced that they will publish a consultation paper on taxonomy-related product disclosures under the Taxonomy Regulation (that amended the SFDR) in March 2021.