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Sustainable Finance Update (Asset Management): Final Report On SFDR RTS Regarding Taxonomy-Related Disclosures – Finance and Banking



European Union:

Sustainable Finance Update (Asset Management): Final Report On SFDR RTS Regarding Taxonomy-Related Disclosures


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On 22 October 2021, the European Supervisory Authorities or ESAs
(EBA, EIOPA and ESMA) presented the European Commission with their
Final Report on the draft Regulatory Technical Standards (RTS)
regarding taxonomy-related pre-contractual and periodic disclosures
under SFDR, as amended by the Taxonomy Regulation (Taxonomy
RTS).

The additional disclosure requirements in the Taxonomy RTS only
concern those article 8 and 9 SFDR funds that make sustainable
investments contributing to environmental objectives. It is
interesting to note that the ESAs propose to treat these funds as a
“subset” of a larger article 8 or 9 SFDR category,
referring to them in the Final Report as “Article 5 and 6
products”.

As announced in its letter to the European Council and European
Parliament dated 8 July 2021, the European Commission’s
intention is to bundle all 13 RTS into one single delegated act
with an expected application date of 1 July 2022. The ESAs approach
in the draft Taxonomy RTS is therefore to amend the SFDR RTS, which
were published on 4 February 2021 and which concern certain other
disclosure requirements under SFDR, thereby creating a single
rulebook.

Given that the ESAs lack the necessary powers to do so, the
Final Report provides no guidance on how financial market
participants should comply in the meantime with the
taxonomy-related disclosure requirements in the primary legislation
(i.e. articles 5 and 6 of the Taxonomy Regulation) which will start
applying from 1 January 2022.

According to the ESAs, the Taxonomy RTS reflect the responses
received to the ESAs’ consultation paper which was published on
17 March 2021. In comparison to the initial draft RTS published as
part of that consultation, the following new aspects can be
highlighted:

  • The pre-contractual and periodic disclosure templates have been
    amended in order to change the order of certain sections and to
    reflect the ESAs’ proposed changes.

  • There is no longer a derogation for taxonomy-aligned
    sustainable investments to apply the Do No Significant Harm (DNSH)
    principle and as result the DNSH related-rules will apply to all
    sustainable investments.

  • From 30 December 2022, the disclosure whether Principal Adverse
    Impacts on sustainability factors are considered will also require
    information on how they are considered and a statement that
    information in this regard is available in the annual report (in
    line with the deadline for pre-contractual disclosure requirements
    of article 7(1) SFDR).

  • The biggest changes have been made to the asset allocation
    section regarding the requirement to show “how and to what
    extent” the underlying investments qualify as environmentally
    sustainable under the Taxonomy Regulation:

    • To address the issue of potentially low KPIs where financial
      products have high exposures to sovereigns due to the lack of a
      reliable methodology to determine taxonomy-aligned activities
      funded by sovereign issuers, the ESAs propose a dual approach
      consisting of the calculation of two KPIs. The first KPI would be
      calculated 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 template (one including sovereigns and the other
      not).

    • Clarification of the KPIs to be used for financial and
      non-financial undertakings.

    • Regarding the question “how” underlying investments
      are taxonomy-aligned, while no mandatory audit is required, it
      needs to be disclosed whether compliance will be subject to an
      assurance provided by an auditor / third party.

    • Following criticism during the consultation that sustainable
      investments with a social objective were not included in the
      initial draft of the Taxonomy RTS, these have now been expressly
      included, with a requirement to disclose the minimum share of
      social investments.

    • Infrastructure assets, securitisation positions and other
      article 5 and 6 Taxonomy Regulation products (e.g. funds) are now
      part of the list of investments that can be included in the
      numerator for the purpose of calculating the taxonomy-alignment of
      investments.

    • Confirmation that due to a lack of reliable methodologies,
      derivatives should not be included in the numerator of the KPI to
      calculate taxonomy-alignment of investments (but to be included in
      the denominator).

    • There is a requirement to apply netting when calculating
      taxonomy-alignment.

Next steps

The European Commission now has three months to decide whether
to endorse the Taxonomy RTS.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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