Delay to Finalised RTS Generates Uncertainty Ahead of SFDR Level 1

Asset managers’ compliance plans complicated by “unhelpful” regulatory guidance.

Advice to asset managers from European supervisors to utilise draft guidance to comply with Level 1 of the Sustainable Finance Disclosure Regulation (SFDR) will cause additional uncertainty to their preparations, lawyers have warned.

SFDR requires asset managers to provide detailed information to customers to justify marketing their investment solutions as ‘green’. Under Level 1, which starts March 10, they must supply periodic reporting, augmented by more detailed underlying data during Level 2, which is intended to commence next year.

The details for Level 2 information were expected to be finalised in regulatory technical standards (RTS) early in Q1 2021. But criticism of the draft RTSs in January 2021 led the European Supervisory Authorities (ESAs) to submit revised drafts in early February, which will take the European Commission no less than three months to approve.

Asset managers had been hoping that finalised RTSs for Level 2 would be available to assist in their final preparations for compliance with SFDR’s Level 1 requirements.

Supervisory guidance issued last week by the ESAs – that asset managers should simply use existing draft RTSs – has been described as “unhelpful” by Linklaters.

“We do not consider that this suggestion imposes a requirement for firms to pre-comply with the draft RTS […] but it may encourage certain competent authorities to be more hard-line in their supervisory approach during this interim period,” said Victoria Hickman, Managing Professional Support Lawyer at Linklaters.

The current timelines mean that the Level 2 RTSs may not be enforced until January 2022. However, the ESAs said the delay is necessary to “allow national competent authorities […] to prepare for the orderly and effective supervision of compliance by financial market participants and financial advisers”.

Their latest guidance doesn’t impose new requirements for asset managers to follow, but rather calls for more cohesion between national competent authorities to ensure SFDR compliance is consistent through the implementation of the RTSs, said Phil Spyropoulos, Financial Services Lawyer at Eversheds Sutherland.

“The joint paper may achieve some consistency in that all national competent authorities are encouraged to engage with their local markets and provide assistance. The alternative might have seen the more proactive markets moving independently,” he noted.

The ESAs stated that the draft RTSs should be used as a reference point for the following SFDR requirements: periodic reporting for funds, portfolios or products that fall under Articles 8 and 9; disclosure of information complying with the “do no significant harm” principle; and asset manager-level disclosures of the sustainability impacts of their investment decisions.

“We welcome a delay to the RTSs, as it wouldn’t have been possible for firms to comply with these measures sooner. That said, I’m sure firms would have hoped for a longer delay,” Spyropoulos said.

Aligning Taxonomy Regulation with NFRD update 

Last week, the European Securities and Markets Authority (ESMA) published its final guidance on aligning reporting requirements under Article 8 of the EU Taxonomy with the planned update to the Non-Financial Reporting Directive (NFRD).

Article 8 requires asset managers to include information as to how, and to what extent, their activities are associated with environmentally sustainable economic activities. As a part of this, asset managers need to have an understanding of companies’ exposure to environmental risks.

NFRD ensures large companies of more than 500 employees disclose non-financial information on their social and environmental impact. Following previous criticism of NFRD – citing lack of comparability and transparency – the updated directive is expected to be published by the European Commission Q1 2021.

“The reform of the NFRD and the development of accompanying standards [to align to Article 8] is the next step for policymakers in Europe to complete the picture, as investors will need to get relevant and comparable information from the companies they invest in,” said Filip Gregor, Head of Responsible Companies at Frank Bold.

From June 2021, the delegated act on NFRD entity reporting will be adopted under Article 8 of the impending Taxonomy Regulation, uniting asset managers’ reporting requirements under one article.

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