SFDR / Sustainable Finance Update – Finance and Banking

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European Union: SFDR / Sustainable Finance Update

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1. Report of the level 2 RTS linked to the SFDR / Taxonomy

In a letter of July 8, 2021 , the European Commission has indicated that it will postpone the date of application of the level 2 regulatory technical standards of the SFDR (“RTS“) six months from January 1, 2022 to July 1, 2022.

One of the reasons for the delay is that the current SFDR Level 2 RTS draft needs to be amended to include additional requirements regarding activities that contribute to / promote climate change mitigation and / or adaptation to climate change as defined in the Taxonomy Regulations.

The European Commission plans to consolidate all level 2 RTS related to SFDR / taxonomy into a single delegated act that it will submit to the European Parliament and the Council for approval in the coming weeks.

2. Publication of delegated acts relating to taxonomy

Also with regard to the taxonomy regulation:

  • The delegated act which specifies the technical selection criteria to determine the conditions under which an economic activity can be considered as contributing substantially (i) to the mitigation of climate change or (ii) to the adaptation to climate change and to determine if this economic activity does not cause any significant damage to any of the other environmental objectives, was adopted on June 4, 2021 (Climate delegated act and his Annex 1 and Annex 2 ).
  • Article 8 (1) of the Taxonomy Regulation provides that certain large companies which are required to publish non-financial information under the Directive on non-financial reporting (“NFRD“) should disclose to the public information on how and to what extent their activities are associated with environmentally sustainable economic activities, as defined in EU taxonomic legislation. On 6 July 2021, the delegated act on the information to be disclosed was adopted.

3. FAQ from the European Commission on the application of the SFDR

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

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

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

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

The aim is to ensure that financial companies, e.g. advisers, asset managers (MiFID / AIFM companies / UCITS management companies) include risks and sustainability factors in their procedures. The existing MiFID II suitability assessment is also supplemented by questions on customer preferences for sustainability.

Changes to the sustainability preferences of UCITS, AIFM and MiFID II will become applicable in August 2022 and changes to governance rules for MiFID II products will begin to apply in November 2022.

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

On July 6, 2021, the Commission published its new Strategy for financing the transition to a sustainable economy (“New strategy“), which intends to continue implementing 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, the following two of which may be of particular interest to the asset management industry:

  • Proposal of minimum sustainability criteria, or a combination of criteria, for financial products falling within the scope of Article 8 of the SFDR in order to ensure minimum sustainability performance of these products. It should be noted that the Commission does not provide further details on the nature of these minimum sustainability criteria nor on when it would seek to implement them.
  • Consideration of the merits of further changes to enable financial market participants and financial advisers to systematically examine the positive and negative impacts on the sustainability of their investment decisions and advice. This would concern both AIFMs and UCITS management companies and would essentially impose on them the double materiality requirement which is not currently provided for by SFDR.

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

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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