Questions on the interpretation of SFDR and the Taxonomy Regulation

Many of the ESAs' questions to the European Commission relate to points which are actively being considered by financial services firms as part of their implementation of the EU's new sustainability legislation, including whether they can opt certain products in to the principal adverse impact (PAI) regime even if they have not opted in at firm-level, the application of the Taxonomy Regulation to their Article 8 and Article 9 products, and the application of the SFDR's disclosure requirements to products which existed pre-SFDR and/or are no longer being made available to new investors. 

Therefore further guidance from the European Commission will be very welcome. However, it is not yet clear when the European Commission will respond to the questions (or how helpful their guidance will be). Previous European Commission attempts to clarify various uncertainties have not been entirely successful. The industry associations and other interested stakeholders will now engage with the European Commission to suggest answers to these questions which are consistent with developing industry practice.

The ESAs' questions to the European Commission include the following:

Questions on SFDR

• PAI disclosures:

• • Whether financial market participants that choose not to consider adverse impacts of investment decisions on sustainability factors at entity level (and are not required to do so due to their size) may, nevertheless, consider and disclose PAI at product level for some financial products.
    
    
  • Whether financial advisers recommending financial products or instruments, that are not collective or individual portfolios managed by financial market participants, are required to collect information from non-financial companies for those products and instruments in order to make any principal adverse impact disclosures.

• Application to existing and no longer available products:

• • Whether the disclosures on the integration of sustainability risks and adverse sustainability impacts apply only for new financial products or also for those which existed at the time SFDR came into force (i.e. 10 March 2021).
    
    
  • Whether the pre-contractual, website and periodic disclosures must be made to existing investors in respect of financial products that are no longer made available to new investors.

• Good governance:

• • Whether a financial product can fall within Article 8 or 9 SFDR if it does not invest in companies with good governance.
    
    
  • Whether a financial product can potentially fall within Article 8 or 9 SFDR if it doesn't invest in a "company" e.g. if it solely invests in government bonds.

• MiFID II disclosures: Whether financial advisers, when providing MiFID II investment advice, must make pre-contractual disclosures on the integration of sustainability risks before the client is bound by an agreement for any type of MiFID II investment advice or just investment advice in respect of financial products falling under SFDR.
  
  
• Non-SFDR products: Whether financial advisers that only consider products which are not in scope of SFDR (e.g. shares of listed companies, corporate bonds) are still required to comply with the disclosure obligations in SFDR.
  
  
• Definition of "employ" and "employee": How self-employed staff, owner managers or part-time employees are treated for the purposes of the exemption in Article 17 SFDR for certain advisory firms that employ fewer than three persons.
  
  

Questions on the Taxonomy Regulation

• Article 8 financial product disclosures:

• • Whether a financial market participant is obliged to make the disclosures in the Taxonomy Regulation for an Article 8 financial product which promotes environmental characteristics but does not commit to investing in any economic activities contributing to an environmental objective within the definition of "sustainable investment".
    
    
  • Whether a financial market participant would later have to make the disclosures in the Taxonomy Regulation if it is later determined later that the Article 8 financial product referred to above did, in fact, invest in economic activities contributing to an environmental objective.

• Article 9 financial product disclosures: Whether a financial market participant is obliged to make the disclosures in the Taxonomy Regulation for an Article 9 financial product which only committed to investing in economic activities contributing to social objectives and is later determined to have, in fact, invested in economic activities contributing to an environmental objective.

Separately, the European Commission has invited the ESAs to propose amendments to the SFDR Delegated Regulation in respect of pre-contractual and website disclosures and disclosures in periodic reports for investments in fossil gas and nuclear energy activities following the adoption of the Complementary Climate Delegated Regulation which confirmed that such activities can, subject to compliance with certain criteria, be Taxonomy-aligned. The ESAs have been asked to provide their comments by 22 September 2022.

The European Commission has also requested that the ESAs make proposals for some targeted amendments to the SFDR Delegated Regulation including in respect of PAI indicators and the disclosure requirements in respect of decarbonisation targets and under the Taxonomy Regulation. These proposals should be provided within 12 months of the request i.e. by April 2023.

If you would like further information or assistance in understanding the ESA's questions, or the EU sustainability regime generally, please speak to your usual Travers Smith contact or any of the individuals below.