On 4 February 2021, the European Supervisory Authorities (ESAs) published their Final Report on draft Regulatory Technical Standards (hereinafter, the “Draft RTS”) with regard to the content, methodologies and presentation of sustainability-related disclosures under Regulation (EU) 2019/2088 (hereinafter Sustainable Finance Disclosure Regulation “SFDR”).
The Draft RTS aims to strengthen protection for end-investors by improving disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products.
One of the proposals regards the entity–level principal adverse impact disclosures. The principal impacts that investment decisions have on sustainability factors should be disclosed on the entity’s website.
The disclosure should take the form of a statement showing how investments adversely impact indicators in relation to climate, environment, social and employee matters, respect for human rights, anti-corruption and anti-bribery.
The principal adverse impact reporting in the SFDR is based on the principle of proportionality – for companies with less than 500 employees, the entity level principal adverse impact reporting applies on a comply or explain basis.
The Draft RTS contains templates for pre-contractual and periodic product disclosures and relates to several disclosure obligations under the SFDR regarding the publication of:
- The details of the presentation and content of the information in relation to the principle of "do not significantly harm" as set out in Article 2(17) of the SFDR consistent with the content, methodologies, and presentation of indicators in relation to adverse impacts referred to in Article 4(6) and (7) SFDR (Article 2a SFDR).
- A statement on an entity’s website describing its due diligence policy in respect of the adverse impact of investment decisions on sustainability factors in relation to climate and other environment-related impacts (Article 4(6) SFDR) and adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters (Article 4(7) SFDR).
- Pre-contractual information on how a product with environmental or social characteristics meets those characteristics and if an index has been designated as a reference benchmark, whether and how that index is consistent with those characteristics (Article 8 SFDR).
- Pre-contractual information to show, where a product has sustainable investment objectives and a) has a designated index as a reference benchmark, how that index is aligned with the sustainable investment objective and an explanation as to why and how that designated index differs from a broad market index (Article 9(1) SFDR); or b) if no index has been designated as a reference benchmark, an explanation on how those objectives are to be attained (Article 9(2) SFDR).
- Information on an entity’s website to describe the environmental or social characteristics of financial products or the sustainable investment and the methodologies used (Article 10 SFDR).
- Information in periodic reports according to sectoral legislation specifying (a) the extent to which products with environmental and/or social characteristics meet those characteristics, and (b) for products with sustainable investment objectives and products whose objective is a reduction in carbon emissions: (i) the overall sustainability-related impact of the product by means of relevant sustainability indicators and (ii) where an index has been designated as a reference benchmark, a comparison between the overall impact of the financial product with the designated index and a broad market index through sustainability indicators (Article 11 SFDR).
The European Commission is expected to endorse the Draft RTS within 3 months from their publication.
The ESAs have proposed in the Draft RTS that the application date should be 1 January 2022, (except the reporting on Scope 3 greenhouse gas (“GHG”) emissions in Tables 1 (on the principal adverse sustainability impacts statement) and 2 (on additional climate and other environment-related indicators) of Annex I that should apply from 1 January 2023).