Sustainable finance: latest developments

From 10 March 2021, credit institutions and investments firms providing portfolio management services or investment advice, terms defined by MIFID II, must comply with Level 1 transparency obligations regarding the impact of ESG factors on their activities and products, as set out in the Disclosure Regulation (EU) 2019/2088 ("SFDR"). The insurance and pension sector is also affected, depending on activities and products offered.

Level 2 obligations will become binding only in 2022.

Additional legislative work at EU level is underway to further the objectives on green finance set out in the European Green Deal.

1. 1. SFDR obligations

Under the SFDR regime, different obligations ("Level 1" and "Level 2" obligations) must be complied with. They have different dates of application.

The Level 1 obligations set out in the SFDR have been applicable since 10 March 2021 (with certain limited exceptions). The Level 1 obligations include, in essence, transparency obligations at entity level (website) and at product level (pre-contractual disclosures) regarding sustainable risks and impacts. Enhanced transparency obligations apply to so-called Article 8 (promotion of ESG characteristics) and Article 9 (with sustainable investment objectives) products through specific disclosures via websites, pre-contractual documents and periodic reports.

The SFDR obligations must also be read in light of the disclosure obligations resulting from the Taxonomy Regulation. It provides an EU classification system, establishing a list to determine which economic activities classify as environmentally sustainable with the aim to prevent greenwashing.

Some SFDR Level 1 obligations need to be complemented by Regulatory Technical Standards (“RTS”) developed by the European Supervisory Authorities (“ESAs”), which were published in final draft form on 2 February 2021 (Final Regulatory Technical Standards - SFDR).

These RTS represent the “Level 2” text of the SFDR. They specify the content, methodologies and presentation of some Level 1 disclosures required by the SFDR. The RTS also provide for mandatory indicators and mandatory templates to be used.

In order to help you navigate through the applicable legal texts, an interactive compilation is available on our website (Interactive compilation - Sustainable Finance).

2. 2. Further details on the RTS and the interim period (10 March 2021 - 1 January 2022)

On 25 February 2021, the ESAs published a joint statement (Joint ESA Supervisory Statement - SFDR.):

• confirming earlier statements of the Commission that the application of Level 1 obligations is not conditional on the entry into force of the RTS;
• providing guidance to ensure the effective and consistent application of the SFDR during this interim period; and
• recommending entities to use the interim period to prepare for the application of the RTS.

The Commission is expected to endorse the RTS within 3 months of their publication. The ESAs recommend that the RTS only become binding on 1 January 2022 to allow covered entities to adapt and to provide for the alignment of the application of the RTS with the application of the amendments in the Taxonomy Regulation as well as the application of periodic reporting in the SFDR.

To assist in this process, the ESAs provide a table laying out the implementation timelines of the various disclosure obligations of the SFDR and of the Taxonomy Regulation.

Firms should take a high level and principle-based approach to compliance with those provisions of SFDR that rely upon the implementation of the Level 2 RTS but can use the draft RTS as a reference in the interim period.

At Luxembourg level, the CSSF confirmed this approach in press release of 12 March 2021 regarding the application of SFDR and the related RTS while also providing guidance on the application timeline for the specific obligations of entity-level principal adverse impact statements and products’ periodic reporting.

3. 3. Latest developments

The ESAs indicated in the joint statement that the “RTS will be amended by forthcoming RTS under new empowerments added to the SFDR by the Taxonomy Regulation, which will include additional disclosures for investments in Taxonomy-aligned activities". On 15 March 2021, the ESAs published a new consultation on taxonomy-related sustainability disclosures (see link here), which includes a draft of new, consolidated RTS.

Furthermore, legislative work is underway at EU level on several topics: an EU green bond standard, a revision of the companies' obligations regarding non-financial disclosures and the review of the Non-Financial Reporting Directive (NFRD) as well as necessary amendments to transparency obligations set out in certain directives, such as MiFID II or Solvency II.

At Luxembourg level, Bill of Law 7774 was introduced on 12 March 2021 to implement the SFDR and the Taxonomy Regulation. The Bill defines the supervisory and investigative powers of the CSSF, supervisory authority for compliance with SFDR and Taxonomy Regulation obligation by relevant financial sector entities under its supervision. The CAA (Commissariat aux Assurances) is appointed as supervisory authority for affected entities under its supervision. Administrative sanctions powers will include the power to impose fines to a maximum of 250,000 euros.