Looking for a compass
In our previous SFDR research paper “5 things to know about SFDR in June 2022” we gave a high-level explanation of the 5 most important elements to know about the implementation of the EU Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation as they stand today, mid 2022. This second paper focuses on the entry into force, early 2023, of the SFDR Level 2 Regulatory Technical Standards (RTS). 

As a reminder, SFDR Level 1 became effective in March 2021. As usual when it comes to the implementation of EU regulation, the first layer of implementation was primarily focused on the application of the high-level principles of the framework. Financial market participants were asked to disclose their Sustainability Risk Policies at entity level, and to state how their Remuneration Policies take sustainability into consideration. SFDR 1 also introduced a certain number of mostly qualitative disclosures at product level, the most important ones being : 

• whether the product has sustainable investing as its main objective(‘article 9’ product classification), or 

• whether the product merely promotes, among others, Environmental or Social characteristics (‘article 8’ product classification), or 

• none of the above, meaning the product does not take into account ESG aspects, or at least not in a meaningful way (‘article 6’ product classification)

These product definitions being rather vague, they are open to interpretation. This is why the industry was looking forward to the publication of the Regulatory Technical Standards (RTS), referred to as SFDR Level 2, complementing the Level 1 text, and giving further guidance regarding the content, methodologies and presentation of information of the SFDR disclosure obligations. Initially expected by December 2021, the RTS were finally published on July 25th 2022 and will enter into force on January 1st, 2023. Hence, preparations for their implementation are in full swing, and now is a good time to share our thoughts on the essential elements of these Level 2 Regulatory Technical Standards.

Disclosure Templates: describing the minimum share of Sustainable Investments

The disclosure templates are among the most important items within the RTS. There are five of them: 

• One covering the disclosure obligations at entity level on the Principal Adverse Impact indicators (PAIs) 

• Two covering the pre-contractual disclosure obligations at product level, including any taxonomy-related information needed (one for Article 8 and one for Article 9 products) 

• And two periodic reporting disclosure templates at product level (one for Article 8 and one for Article 9 products) 

We will provide more information on the ins-and-outs of the Principal Adverse Impact indicators in our next paper, for now we will focus on the Article 8 and Article 9 product disclosure templates. 

Let’s have a closer look at the pre-contractual disclosure template for Article 9 products. Article 9 product pre-contractual documentation will need to state the minimum level (percentage-wise) of Sustainable Investments within the product, i.e. investments in economic activities that contribute to environmental or social objectives, provided that the investments do not significantly harm any environmental or social objective1 and that the investee companies follow good governance practices. 

Read the full paper, canadv16729_2022_sfdr-2_en_web.pdf (candriam.com)