SFDR Level 2 Delayed Yet Again 

Complexity of combining SFDR and Taxonomy-specific RTSs pushes implementation date back to 2023. 

The European Commission has announced that the second part of the Sustainable Finance Disclosure Regulation (SFDR) will likely be delayed by another six months and adopted from 1 January, 2023. First reports from asset managers and other in scope firms will therefore be expected by July 2023.

SFDR Level 1, which went live in March, asks asset managers to sort their EU-domiciled funds into progressively greener categories: Article 6, 8 or 9. Level 2 will introduce regulatory technical standards (RTSs), through which asset managers have to justify their fund categorisations through a series of both environmental and social principal adverse impact (PAI) disclosures.

Additional RTSs drafted by the three European Supervisory Authorities (ESAs) require asset managers with Article 8 and 9 funds under SFDR to further disclose funds’ level of alignment with the Taxonomy Regulation’s list of environmental activities. All 13 RTSs for both SFDR and taxonomy alignment are set out in the ESAs final report published last month.

The taxonomy lists a series of economic activities that are considered environmentally sustainable and will be coming into force from January 2022. A decision is due to be taken about the inclusion of gas and nuclear energy this month.

In a letter published this week by the ESAs that was sent to the European Parliament and the EU Council, the Commission highlighted that the “length and technical detail” of combining all 13 RTSs meant that one single delegated act cannot feasibly be submitted, finalised and implemented in time for the current deadline.

Level 2 was originally delayed by six months until July 2022 due to difficulties finalising the RTSs.

The further delay will afford more time to prepare for the more complex disclosure requirements, with asset managers encouraged to use the ESAs’ draft RTSs to inform their categorisations in the interim.

A bulletin by law firm Herbert Smith Freehills noted that the additional six-month respite “is all too brief”, with a number of other significant milestones for financial market participants to account for next year, including the Taxonomy Regulation.

Asset managers are still getting to grips with SFDR Level 1, with the Commission responding to concerns from regulators and the industry with a Q&A that attempted to outline the differences between each green-labelled fund category. However, the Commission did not specify minimum sustainable investment thresholds for prospective Article 8 funds, meaning a very wide range of funds currently qualify.

During a press briefing on developing UK regulations hosted by UKSIF, ShareAction and CDP on Tuesday, UKSIF CEO James Alexander said that the UK’s version of SFDR – the Sustainable Disclosure Requirements (SDRs) – is likely to be very different.

“SFDR does have some significant challenges to overcome,” he said. “The UK SDRs are not going to be used as a labelling framework, but rather a broader disclosure framework – it’s unlikely there will be various articles of disclosure.”

The SDRs are expected to include requirements for creators of investment products to report on their products’ sustainability impact and relevant financial risks and opportunities, which will then form the basis of a new sustainable investment labelling regime.

Plans for UK SDRs were outlined in the UK government’s sustainable investing roadmap, which also notes that a Green Taxonomy will be developed in due course. As a consequence of Brexit, the UK adopted the EU’s Taxonomy Regulation framework, but did not onboard SFDR.

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