In recent months, we have published a series of articles on the various components of the SFDR Regulatory Technical Standards (SFDR RTS), also known as Level 2 SFDR.
Finally, on Oct. 22, 2021, the European Supervisory Authorities (ESAs) published their ”Final Report on Draft Regulatory Technical Standards SFDR” (hereinafter level 2 SFDR). What is the relationship between the Level 2 SFDR and the Level 1 Taxonomy Regulation, which comes into effect on Jan. 1, 2022? And how can you prepare for it?
The final SFDR RTS aims to achieve a “one single rule book” for sustainability-related information. This “one single rule book” is at your disposal with this publication as a consolidated text is attached to the above report. However, for the complete picture, you still need to put some puzzle pieces together yourself. For example, you have to pull out the template for the PAI Statement as well as the explanatory notes from an earlier version. This latest Level 2 SFDR contains the requirements and explanations for pre-contractual as well as periodic product information, both for the information you must publish under the SFDR as well as under the Taxonomy Regulation (TR).
The original effective date of the level 2 SFDR was March 10, 2021. This date was postponed last year via a Supervisory Statement on 25 January 2021 to January 1, 2022. Subsequently by letter dated July 8, 2021, the European Commission (EC) indicated that January 1, 2022 has also proved to be unfeasible. Therefore, a postponement of the entry into force by six months is needed, which date is still not been officially announced through a new Supervisory Statement.
Market participants expect the full text Level 2 SFDR to enter into force July 1, 2022, at the earliest. The ESAs also assume a postponement as they indicate in this (latest) Level 2 SFDR: “In light of this, the ESAs acknowledge that the date of application of the draft RTS (level 2 SFDR), originally indicated as January 1, 2022, is likely to be moved forward.”
Until then, we encourage you to fill in the templates for Articles 8 and 9 SFDR, which can be found in this Level 2 SFDR RTS, as a trial.
In addition to the entry into force of the level 2 SFDR, another important issue is the entry into force of the Level 1 TR. The hope and expectation were that by now there would be clarity – whether through this Level 2 SFDR or not – on how you should deal with product-level obligations under Level 1 TR. As the TR requires you to publish product-related information as early as January 1, 2022. Pay close attention to whether a below paragraph indicates TR or SFDR!
Article 7 TR requires that for grey products under the SFDR, the so-called Article 6 SFDR products, a mandatory and prescribed sentence should be added to the pre-contractual information. This sentence indicates that the product does not include investments that meet the requirements of the TR.
Article 5 of the TR requires that for Article 9 SFDR products that invest (in part) in economic activities that contribute to climate mitigation or climate adaptation, must include additional information in the pre-contractual information. In short, the extent to which there is an “environmentally sustainable activity” under the TR must be indicated (also called Taxonomy-aligned).
For Article 8 SFDR products that also invest in sustainable investments and (partly) invest in economic activities that contribute to climate mitigation or climate adaptation, also additional information should be included. Article 6 TR stipulates that Article 5 TR applies likewise to such products (article 8 SFDR). So, the extent to which there is an “environmentally sustainable activity” under the TR must be indicated as such. In addition, all Article 8 SFDR products must include a mandatory and prescribed sentence in the pre-contractual information under the TR just like grey products, only more extensive (and puzzling for that matter).
The problem? You must provide disclosures for light green and dark green products, while the screening criteria to determine the extent of an environmentally sustainable activity are not yet final.
In addition, a lot of companies (investee companies) from whom you must collect the required information are not (yet) obliged to provide (you) that information. For example, as the company is not listed, has less than 500 employees or is not based in Europe.
But a mismatch arises also for those companies that do have to publish such information. While as of January 1, 2022, you must start disclosing which activities are Taxonomy aligned, as of January 1, 2022, the companies (in which you invest) must disclose whether they have Taxonomy-eligible activities. Taxonomy eligible? Yes, taxonomy eligible!
Without going into too much detail about it; taxonomy eligible is a far less extensive requirement, something like “it could well be that this activity will become soon taxonomy aligned”. Not until January 1, 2023 (at the earliest) these companies will have to indicate whether the activities are actually Taxonomy-aligned.
One option is to use estimates. The Level 2 SFDR states that when data is not yet available, you may use data from third parties, including data providers. These data providers will just as well be forced to use estimates as currently the required data is not (yet) available.
Another frequently heard alternative is to indicate that there are no taxonomy aligned investments, i.e. 0%. Strictly speaking, this can also be misleading. To assess this percentage is just as impossible as the opposite.
Our advice? Whichever of the aforementioned solutions you choose, be transparent. Specify why you have used estimates or why you are reporting 0%. Specify what information is still missing for meeting the requirements under the TR and at the same time state that, once the information is available, you will publish it (and fulfill that promise). So again, we recommend that you apply the comply or explain principle. Or shall we call it the explain principle from now on?
Could you use support in identifying or implementing (upcoming) ESG regulations, such as the SFDR and Taxonomy Regulation? We would be happy to tell you more about the requirements and their impact on your company. Feel free to contact us without any obligation.
