European Union: Sustainable Finance (Asset Management) Update: RTS SFDR Final Report Regarding Taxonomy Disclosures
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On October 22, 2021, the European Supervisory Authorities or AES (ABE, EIOPA and ESMA) presented to the European Commission their final report on the draft regulatory technical standards (RTS) concerning pre-contractual and periodic disclosures related to taxonomy at title of the SFDR, as amended by the Taxonomy Regulations (Taxonomy RTS).
The additional disclosure obligations of the RTS Taxonomy only concern funds in Articles 8 and 9 of the SFDR that make sustainable investments contributing to environmental objectives. Interestingly, the ESAs propose to treat these funds as a “subset” of a larger category of Articles 8 or 9 SFDR, qualifying them in the final report as “products of Articles 5 and 6”.
As announced in its letter to the European Council and the European Parliament of July 8, 2021, the intention of the European Commission is to consolidate the 13 RTS into a single delegated act with an application date scheduled for July 1, 2022. The approach of the AES in the taxonomy RTS project is therefore to modify the SFDR RTS, which were published on February 4, 2021 and which concern certain other information obligations under the SFDR, thus creating a single regulation.
As the ESAs do not have the necessary powers to do so, the final report does not provide any guidance on how financial market participants should in the meantime comply with the taxonomic disclosure requirements in primary legislation ( i.e. Articles 5 and 6 of the Taxonomy Regulation). which will begin to apply from January 1, 2022.
According to the AES, the taxonomy RTS reflects the responses received to the AES consultation document which was published on March 17, 2021. Compared to the initial draft of RTS published as part of this consultation, the following new aspects can be highlighted:
- The pre-contractual and periodic publication models have been modified in order to modify the order of certain sections and to reflect the modifications proposed by the AES.
- There is no longer a waiver for taxonomically aligned sustainable investments to apply the Do No Significantly Harm (DNSH) principle and therefore the DNSH rules will apply to all sustainable investments.
- From 30 December 2022, the disclosure whether the main negative impacts on the sustainability factors are taken into account will also require information on how they are taken into account and a statement that information in this regard is available in the annual report (in accordance with the pre-contractual disclosure deadline requirements of article 7, paragraph 1, SFDR).
- The most significant changes were made to the section on asset allocation regarding the requirement to show ‘how and to what extent’ the underlying investments are considered environmentally sustainable under the regulation. taxonomy:
- To solve the problem of potentially low KPIs when financial products have high exposures to sovereigns due to the lack of a reliable methodology to determine taxonomically aligned activities funded by sovereign issuers, ESAs offer a dual approach consisting of by calculating two KPIs. The first KPI would be calculated by including all investments in the denominator (including sovereigns) while the second KPI would be calculated in the same way but excluding all sovereign exposures. It will therefore be necessary to disclose two pie charts in the pre-contractual disclosure model (one including sovereigns and the other not).
- Clarification of KPIs to be used for financial and non-financial companies.
- Regarding the question “how” the underlying investments are aligned with the taxonomy, although no mandatory audit is required, it should be indicated whether compliance will be subject to assurance provided by an auditor / third party.
- Following criticisms during the consultation that sustainable investments with a social objective were not included in the initial draft of the RTS Taxonomy, these are now expressly included, with the obligation to disclose the minimum share of social investments.
- Infrastructure assets, securitization positions and other income from Articles 5 and 6 of the Taxonomic Regulation (e.g. funds) are now part of the list of investments that can be included in the numerator for the purpose of calculating alignment taxonomy of investments.
- Confirmation that due to a lack of reliable methodologies, derivatives should not be included in the KPI numerator to calculate the taxonomic alignment of investments (but to be included in the denominator).
- It is mandatory to apply compensation when calculating taxonomic alignment.
The European Commission now has three months to decide whether or not to approve the RTS Taxonomy.
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