Just under three months ago, European regulators (“ESA’s”) published their final proposal of its Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation (“SFDR RTS”). This RTS further defines the Sustainable Finance Disclosure Regulation (“SFDR”). This publication resulted in a starting point for us to zoom into various components of this SFDR RTS. In February we discussed the Do No significant Harm principle, and in March we analyzed the Consideration on adverse impacts on sustainability factors.
In this blog we will zoom into yet another important topic of this SFDR RTS: precontractual disclosures. The SFDR RTS requires financial market participants to comply with numerous requirements in this regard.
The ESA’s propose the SFDR RTS to enter into force on January 1, 2022. For this to take place, the European Commission still needs to adopt this proposal. For now, we are assuming that adoption will take place in time, and are keeping that date as a milestone.
Before we analyse the precontractual information requirements under the SFDR RTS, we would like to stress that the term “precontractual information” in this regard is somewhat misleading. It implies that it refers to information provided by the company before its services begins.
However, this might not always be the case. Let us explain. The SFDR prescribes for each financial product in which document this precontractual sustainability information must be included. For example for an asset manager the precontractual information must be disclosed in the Information Memorandum. Surprisingly the SFDR also lists documents that are not necessarily provided prior to its service. For example, precontractual sustainability information for a pension plan must be included in the so called “Pension 1-2-3” , while participants often do not receive the Pension 1-2-3 until after they joined as a participant.
In short, it is important to assess on beforehand when you should disclose precontractual sustainability information in addition to what information needs to be disclosed.
Let us start by explaining that requirements under the SFDR RTS differ depending on the level of “sustainability” ambition of your product. High product ambitions on sustainability equals intensified level of disclosures and vice versa under the SFDR RTS.
If you offer a so called “grey” product, meaning a products that has – compared to a product qualified as an article 8 (“light green”) or 9 (“dark green”) product under the SFDR – no sustainable ambitions, no additional precontractual disclosure requirements apply under the SFDR RTS.
Nevertheless, we invite you to still mark January 1, 2022 in your calendar. As the Taxonomy Regulation, a regulation in the field of environmental sustainability economic activities entails a precontractual obligation also for grey products to comply with on the same date. This regulation requires you to insert the following sentence in the precontractual information of your grey product:
“The underlying investments of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.”
If your product qualifies as an article 8 (light green) or article 9 (dark green) under the SFDR, you need to adhere to additional disclosure requirements included in the SFDR RTS. You are required to fill out a four-page form, answering questions such as:
In addition to the SFDR you must adhere to the Taxonomy Regulation. For instance when offering sustainable investments you must also indicate to what extent these investments meet the EU criteria for environmentally sustainable economic activities, so called Taxonomy aligned investments.
As all of these questions together are quite detailed financial market participants will need to allocate sufficient capacity and resources to formulate well reasoned answers. And equally or even more important: you will need to obtain the necessary data to substantiate your claim.
Not an easy job. The AFM therefore warns financial market participants: make sure that the sustainability objectives or characteristics are carefully formulated, so that the results achieved can also be measured. Be aware that you may be dependent on other parties in the investment chain such as external asset managers and data suppliers.
Prior to this SFDR RTS, the ESA’s already indicated in its consultation document that it would be an enormous challenge to develop a single template that would accommodate all the different precontractual information documents listed in article 6(3) of the SFDR. Unfortunately, there was no room to develop multiple templates; the ESAs are authorized to develop one single uniform precontractual product template.
In this SFDR RTS the ESA’s indicate that they have drafted a template which includes a balance between comprehensibility and comprehensiveness. It remains to be seen whether the ESA’s have succeeded. Not only the range of products for which this template is drafted is diverse; so are its readers.
An institutional investor seeking to invest in an investment vehicle may be willing to study the information memorandum including this SFDR template thoroughly, but whether a consumer will do the same is highly questionable. Similarly, a participant who receives this information because he or she is a mandatory member of a pension fund might be less tempted to take in all the sustainability information disclosed in the template. Such a template with four sides of sustainability information seems a bit over the top.
The use of this template is mandatory for article 8 (‘lightgreen”) and 9 (“dark green”) products under the SFDR. As the disclosure requirements for these products are identical it increases comparability on sustainability matters, but we also believe that some room to tailor such a disclosure to a specific type of product and or readership would have been welcome. The above is example already shows that it is extremely difficult to lump all types of financial products and its readers together: one size never fits all.
Do you have questions in response to the above information? Could you use support in identifying or implementing (upcoming) ESG regulations, such as the SFDR? We would be happy to tell you more about ESG regulations for the financial sector, and their impact on your company. Read more about our help with ESG compliance, or contact us.
