The “Level 1” text of the SFDR already requires “financial market participants” to make certain disclosures as to whether a financial product should be classified as an Article 6 (no sustainability objective), Article 8 (promoting environmental or sustainable characteristics) or Article 9 (sustainable investment as its objective) product, and whether they disclose the principal adverse impacts (PAIs) of their products. Whilst EU regulated firms are primarily within direct scope of the definition of a “financial market participant”, SFDR disclosures also apply directly to non-EU firms marketing funds into the EU under national private placement regimes. In addition, pressure from EU-based investors may lead non-EU firms to decide to voluntarily comply with SFDR disclosure standards; EU institutional investors in particular are increasingly expecting external portfolio managers to label their offering as Article 6, Article 8 or Article 9 regardless of whether the portfolio manager is directly within scope of the SFDR.
The SFDR RTS is key to setting disclosure standards as it sets out the content, methodology and presentation of Article 8 and 9 disclosures, along with PAI disclosures. The letter from the European Commission confirms the following:
- Format of the RTS: the European Supervisory Authorities (ESAs) had previously submitted draft RTS in two tranches - the first was in February 2021 and the second was in October 2021. The letter notes that draft RTS from February and October will be merged into a single instrument and adopted in that form.
- Delay in application: the Commission notes that it has not had enough time to consider the draft RTS submitted in October 2021, and will delay the applicability of the RTS. The SFDR RTS will apply from 1 January 2023, with financial market participants having to disclose PAIs and the sustainability features of their financial products for the first time by 30 June 2023. That first PAI disclosure would need to cover the first reference period under the RTS - 1 January 2022 to 31 December 2022 - which means that firms will need to start gathering relevant data from 1 January 2022.
Impact of the SFDR RTS delay
Many firms have had to make certain disclosures from March 2021 as a result of implementation of the Level 1 SFDR obligations, and will be well placed to prepare for transition to the requirements to be set out in the RTS. However, while the general delay to what will be complex and technical requirements is no doubt welcome, the timing of the PAI disclosures presents a more pressing issue: the initial PAI disclosures are required to be published by 30 June 2023, but the data that goes into this initial disclosure will need to stretch back to 1 January 2022, leaving firms intending to make PAI disclosures with little choice but to prepare imminently to collect data in advance of the final RTS. Although we do not expect the European Commission’s final text to shift dramatically from the draft RTS issued by the ESAs, without final RTS firms will need to refer to those drafts when collecting data items and assessing gaps, and make any necessary adjustments based on the Commission’s finalized RTS.