On 6 April 2022, the European Commission published the long-awaited final version of the detailed rules – the Regulatory Technical Standards (RTS) – under the EU Sustainable Finance Disclosure Regulation (SFDR).
Crucially, annexed to the RTS are the final prescribed-form templates for:
- pre-contractual disclosures for Article 8 products (those which promote environmental or social characteristics)
- annual reports for Article 8 products
- pre-contractual disclosures for Article 9 products (those which invest exclusively in "sustainable investments" within the meaning of Article 2(17) SFDR)
- annual reports for Article 9 products
- the statement for presenting key performance indicators under the principal adverse impacts regime
When will the RTS come into effect?
The RTS will come into effect on 1 January 2023. To date, firms have been required to comply with SFDR on a best efforts basis. It's possible that firms may gravitate towards using the templates somewhat sooner.
Does "final" really mean final?
Almost certainly, yes. The version published has been formally adopted by the European Commission and, whilst it must go through a scrutiny period of three months (extendable to six) before the European Council and European Parliament, it is highly unlikely that any further changes will be made: the drafts must either be adopted in their present form or rejected in their entirety (something that neither the Council nor the Parliament is likely to do at this late stage).
Helpfully, the RTS consolidate into a single place detailed implementing rules which had – during the legislative development phase – been scattered across separate pieces of legal drafting from the European Supervisory Authorities in their papers from February, March and October 2021. See our February, March and October 2021 legal briefings.
Has the Commission made changes to the earlier drafts?
Yes, but most revisions are editorial and, in substance, the final RTS are consistent with the earlier drafts. In particular, the modest changes to the Article 8 and 9 product templates principally take the form of explanatory text to guide firms' disclosures.
With one exception, the Commission has similarly made few changes to the principal adverse impacts disclosure template and its indicators. The exception is that firms which will make this disclosure must now, by reference to each indicator, state what actions they have planned and the targets they will set for the next reference period (new) in addition to reporting on the actions they have already taken (from the earlier drafts).
We expect that this means that views adopted by our clients on some of the legal uncertainties arising out of SFDR will not need to change.
Public website disclosures
We noted in our February 2021 briefing that the ESAs had suggested that, when making public disclosures: "financial market participants should comply with national and Union law governing the protection of confidentiality of information, including the protection of undisclosed know-how and business information and the processing of personal data.”
This wording has unhelpfully been deleted from the final RTS. Firms will wish to carefully consider the implications of this omission.
SFDR and product labelling
The final RTS stick to the messaging that SFDR is not intended to create a product labelling regime. However, in various fora, including a recent speech by the Executive Director of ESMA, the EU has appreciated that SFDR is being used by market participants as if it were a product labelling regime.
As a result, the authorities are likely to review the legal framework in due course, which could possibly result in the introduction of new minimum criteria for Article 8 and 9 products.
Any such minimum standards would seem to require an amendment to SFDR itself. This is unlikely to be a quick process, but the industry will nonetheless need to engage with the EU institutions if minimum standards are developed as investor appetite for Article 8 products is unlikely to reduce because the criteria have changed. Trade associations and other stakeholders will doubtless push for any changes to Article 8 or 9 qualifying criteria to be prospective, as opposed to retroactive.
