SFDR/Sustainable Finance update

1. Postponement of Level 2 SFDR/Taxonomy related RTS

In a letter dated 8 July 2021, the EU Commission indicated that it will defer the application date of the SFDR level 2 Regulatory Technical Standards (“RTS”) by six months from 1 January 2022 to 1 July 2022.

One of the reasons of the delay is the fact that the current draft SFDR level 2 RTS needs to be amended in order to include additional requirements in relation to activities that contribute to/promote climate change mitigation and/or climate change adaptation as defined in the Taxonomy Regulation.

The EU Commission plans to bundle all SFDR/Taxonomy related level 2 RTS into one single delegated act that it will submit to the EU Parliament and the Council for approval in the coming weeks.
 

2. Publication of Taxonomy related delegated acts

Also in relation to the Taxonomy Regulation:

• The delegated act which specifies the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to (i) climate change mitigation or (ii) climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives, was adopted on 4 June 2021 (Climate Delegated Act and its Annex 1 and Annex 2).
• Article 8(1) Taxonomy Regulation provides that certain large undertakings that are required to publish non-financial information under the the Non-Financial Reporting Directive (“NFRD”) should disclose information to the public on how and to what extent their activities are associated with environmentally sustainable economic activities, as defined under the EU Taxonomy legislation. On 6 July 2021, the delegated act on the information to be disclosed was adopted.
   

3. EU Commission FAQ on the application of SFDR

At the end July 2021, the EU Commission published an FAQ on the application on SFDR which includes some answers to the priority questions raised by the ESAs in January 2021. The answers provide clarification on:

• the application of SFDR to registered AIFMs and to non-EU AIFMs;
• the meaning of "promotion" in the context of financial products promoting environmental or social characteristics (Article 8 of SFDR);
• clarifications as regards financial products with a sustainable investment objective (Article 9 SFDR);
• the application of SFDR product rules to portfolios managed on a discretionary basis and dedicated funds.

4. Amendment of UCITS, AIFM and MiFID level 2 measures to integrate sustainability risks

On 2 August 2021, the delegated acts amending UCITS, AIFM and MiFID level 2 measures to integrate sustainability risks, factors and preferences were published in the OJEU.

The objective is to ensure that financial firms, e.g. advisers, asset managers (MiFID firms / AIFMs / UCITS management companies) include sustainability risks and factors in their procedures. The existing MiFID II suitability assessment is also completed with questions on clients’ sustainability preferences.

The amendments to UCITS, AIFMs and MiFID II sustainability preferences will become applicable in August 2022 and the amendments to MiFID II product governance rules start to apply in November 2022.
 

5. A new phase in the EU’s sustainable finance strategy

On 6 July 2021, the Commission published its new Strategy for Financing the Transition to a Sustainable Economy (“New Strategy”) , which seeks to further implement its 2018 action plan for sustainable finance (as part of the European Green Deal).

The New Strategy includes six specific action plans within the four main policy areas of which the following two may be of particular interest for the asset management industry:

• Proposal for minimum sustainability criteria, or a combination of criteria, for financial products in scope of Article 8 SFDR in order to guarantee minimum sustainability performance of such products. It should be noted that the Commission does not provide any further details on what these minimum sustainability criteria would consist of nor by when it would seek to implement this.
• Consideration of the merits of further changes to enable financial markets participants and financial advisers to systematically consider the positive and negative sustainability impacts of their investment decisions and advices. This would concern both AIFMs and UCITS management companies and would in essence impose the double materiality requirement on them which is not currently foreseen by SFDR.

The Commission also announced its proposal for a Regulation on European green bond standards.