knowledge 18 April 2023 |

Sustainable Finance: SFDR and the Taxonomy Regulation Developments

1. European Commission responds to ESA queries on SFDR

On 14 April 2023, the European Commission (the “Commission”) published its response to the European Supervisory Authorities’ (“ESAs”) queries from 9 September 2022 on the Sustainable Finance Disclosure Regulation (“SFDR”).¹ The Commission response includes a covering letter (here) and a Commission Decision (here), together with two annexes which include updated questions and answers on the SFDR.

Annex 1 (here) provides answers in relation to, amongst other queries, the interpretation of “sustainable investment” under Article 2(17), the ability of products to fall within the scope of Article 9(3) of SFDR in the context of pursuing either an active or passive investment strategy (noting in particular the Commission’s clarification in relation to financial products which track Paris Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs)), the ability of financial products to promote carbon emissions reduction under Article 8 of SFDR without being in scope of Article 9(3), and the meaning of “considers” where a financial market participant “considers” the principal adverse impacts (“PAI”) of investment decisions on sustainability factors under Article 7 of SFDR.

Annex II contains amendments to the Commission answers to the ESAs’ questions on the interpretation of the SFDR adopted on 6 July 2021 and 13 May 2022 (here).

2. Consultation on proposed amendments to SFDR Delegated Regulation

On 12 April 2023, the ESAs published a consultation paper outlining proposed amendments to the SFDR Delegated Regulation² which lays down the SFDR regulatory technical standards (the “SFDR RTS”) (here). The deadline for responses is 4 July 2023 via the response form.

The ESAs were mandated by the Commission to review and revise the SFDR RTS to broaden the disclosure framework and address technical issues that have been identified since the introduction of SFDR. The ESAs have now developed draft SFDR RTS which are set out in Section 4 of the consultation and which propose amendments in respect of:

• extending the list of universal social indicators for disclosing PAI of investment decisions on the environment and society;

• refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies and formulae for calculation; and

• adding product disclosures regarding greenhouse gas emissions reduction targets, including intermediate targets, the level of ambition and how this decarbonisation target will be achieved. The ESAs note that these disclosure requirements should not create any additional burden for products without such targets.

There are also several technical revisions to the SFDR Delegated Regulation such as:

• improving the disclosures on how sustainable investments “do not significantly harm” the environment and society;

• simplifying pre-contractual and periodic disclosure templates for financial products; and

• introducing other technical adjustments.

3. Taxonomy: new Environmental Delegated Regulations

On 5 April 2023, the Commission consulted on two draft delegated regulations and accompanying annexes establishing technical screening criteria for the remaining four environmental objectives of the Taxonomy Regulation³, that is:

• sustainable use and protection of water and marine resources;

• transition to a circular economy;

• pollution prevention and control; and

• protection and restoration of biodiversity and ecosystems.

The Commission is also proposing targeted amendments to the Taxonomy Climate Delegated Act⁴, which covers the first two environmental objectives of climate change mitigation and adaptation, and to the Taxonomy Disclosures Delegated Act⁵ as part of this consultation.

The deadline for responses to this consultation is 3 May 2023 (here).

Comment and next steps

The Commission’s responses to the ESAs’ queries on the interpretation of the SFDR should be viewed as helpful but the regulatory framework in respect of sustainable finance continues to evolve rapidly and asset managers should remain cognisant that further revisions to the SFDR RTS are on the horizon.

Also contributed to by Jonathan Murchan