Although SFDR has applied from 10 March 2021 and its level II rules from 1 January 2023 many practical points remain, to this date, unclear. This new Q&A covers, among others, issues from principal adverse impact (PAI) measurements to the treatment of investments in other financial products, Taxonomy-alignment calculations, or the need to have websites for the corresponding SFDR disclosures.
Context
On 25 July 2024, the ESAs have published a new entry in their Consolidated questions and answers (Q&A) on the SFDR (Regulation (EU) 2019/2088) and the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288).
In particular, the Sections I (Scope issues), IV (PAI disclosures) and V (Financial product disclosures) were affected with a total of 16 new questions answered. The ESAs announced that they will continue to address queries related to the practical application of the SFDR framework and provide more Q&As where necessary to help the continuing implementation of the framework.
This Q&A has been released one day after the publication of an ESMA opinion, displaying their view on possible long-term improvements to the European sustainable finance regulatory framework, which broadly builds upon the joint opinion published by the ESAs in June 2024.
Key points
ESAs Joint Q&A on the practical application of the SFDR
New questions to the Section I – Scope issues:
- Question 4 on the need to have websites in place to host the Article 10 SFDR website disclosures. This can be done at the level of a product-specific website or group website if they correspond to the website of the AIFM.
Furthermore, the ESAs insist that "the information pursuant to Article 10 of the SFDR must be easily accessible to investors, should be kept up to date, and any revisions or changes to such information should be clearly explained (see Recital 26 and Article 12 of the SFDR and Article 2 of the SFDR Delegated Regulation)."
- Question 5 indicates that even if sustainability risks are deemed irrelevant for a specific product IFMs must still comply with other sustainability risk integration from other regulations notably Article 18(5) of Commission Delegated Regulation (EU) No 231/2013 and Article 23(5) of Commission Directive 2010/43/EU.
New questions to the Section IV – PAI disclosures:
- Questions 26 to 29 provide technical guidance on the calculation of some of the PAIs (e.g. look-through or not, exchange rate to be used, aggregation of data, Scope 1,2,3)
New questions to the Section V – Financial product disclosures:
- Question 20 refers to the calculation and reporting rules for EU Taxonomy alignment at financial product level to be reported in the various pre-contractual and periodic Annexes of the SFDR RTS. The answer is consistent with the approach taken until now that Turnover should be the default KPI to be used for disclosing minimum extent of Taxonomy-alignment in pre-contractual documents while periodic reporting on actual level of Taxonomy alignment is done on all three KPIs (turnover, CapEx and OpEx).
- Question 21 provides a concrete example of how sustainable investment can be measured both at economic activity or investment level.
- Question 22 tackles the specific case of investments in other financial products and on whether or not a look-through should be applied to the underlying investments when applying Article 2(17) SFDR. In their answer the ESAs clarify that "If a financial product invests in other financial products that make sustainable investments with potentially differing applications of Article 2(17) SFDR, the financial market participant should ensure that the underlying investments of the other SFDR financial products comply with its own application of Article 2(17) SFDR." This means that one cannot rely on an alternative application of Article 2(17) SFDR to calculate the percentage of sustainable investments when investments are made in target funds.
- Question 23 similarly to the previous one tackles the case of sustainable investments in a delegation context or for index-tracking financial products. In line with the answer provided under Question 22 the ESAs insist that "[...] the delegating financial market participant must ensure that any investments considered sustainable investments conform to its own application. If the financial product makes investments in investee companies in a delegation arrangement that do not comply with the delegating financial market participant's application of sustainable investments, then that investment is not a sustainable investment for the delegating financial market participant's financial product."
- Question 24 clarifies the treatment of EPM techniques and MMF for Article 9 funds and notably the conditions under which they could be considered as part of the "investments for certain purposes such as hedging or liquidity".
- Question 25 insists that SFDR disclosures remain fully applicable to financial products tracking PABs or CTBs.
- Question 26 concerns website disclosures as mandated under Article 10 SFDR. The ESAs insist here that Article 10 website disclosures include the need to publish the templates in Annexes II to IV of the SFDR RTS, alongside the website specific information.
- Question 27 confirms that when investments in real assets are made through SPVs/holding companies, for these companies good governance checks would not have to be made.
- Finally, Question 28 repeats that Article 9(3) SFDR is neutral in terms of product design which means that Article 9(3) can apply both to financial product tracking PABs or CTBs and to financial products using an active investment strategy.
Click here to access the latest version of the consolidated Q&A
ESMA Opinion on the Sustainable Finance Regulatory Framework
Following the joint opinion on SFDR published by the ESAs, ESMA released their own opinion, providing amendment suggestions to the legislative framework to facilitate investors' access to sustainable investments and support the functioning of the sustainable investment value chain.
ESMA notably reiterates the fact that consumer testing should play a bigger role in the development process of policies, minimum sustainability information disclosure requirements for all financial products should be introduced, while also supporting the introduction of a "product categorisation system. The opinion further encourages the use of the EU Taxonomy as the unique definition for sustainable investments across the market and advocates the inclusion of a legal definition of transition investments into the Sustainable Finance regulatory framework.
Click here to access the ESMA opinion
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