Market “woefully unprepared” for SFDR with one month to go

EU regulators have published the final details for the Sustainable Finance Disclosure Regulation set to take effect next month, even as one practitioner says the market is “woefully unprepared” for its effects.

The three European Supervisory Authorities (ESAs) – the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) – published their final report and draft regulatory technical standards (RTS) for disclosure under the regulation on 4 February.

The SFDR is due to come into force on 10 March, after being passed in November 2019. It obliges firms to disclose how sustainability risks are incorporated into their decision-making and to disclose their investments’ principal adverse impact (PAI) on sustainability.

Firms will have to maintain information on their websites relating to the adverse effects of their investment decisions on sustainability factors, and how their remuneration policies track with the integration of sustainability risks. They will also have to include information about the likely impact of sustainability risks in prospectuses and pre-contractual documents.

The SFDR also includes specific obligations for firms offering products specifically focused on environmental, social and corporate governance (ESG), requiring additional disclosures and periodic updates on how the product’s ESG characteristics are being met.

The new RTS are the final piece of the SFDR jigsaw to be finalised, after the regulation itself delegated the technical detail to the ESAs. The EU regulators said they had drafted the standards with the aim of reducing so-called “greenwashing” – where firms heavily publicise a small number of sustainable products investments without making significant changes to their practices – and in response to investor demands for sustainable products.

They provide greater detail on the information firms will be required to disclose on their websites, outlining the list of indicators firms will need to reckon with. They also detail the product-level disclosures firms will have to make, including what pre-contractual information and information in periodic reports should include.

The RTS require the same disclosures for what ESMA described as “a very broad range of products”, as the ESAs were not empowered to differentiate between the disclosures required of different market participants and products.

Steven Maijoor, chair of the ESAs’ joint committee, said the proposed RTS “strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they be included in documents that are very diverse in length and complexity”.

Although the SFDR’s obligations will begin to bite from 10 March, application of the RTS will have to await their endorsement by the European Commission.

“With only one month to go to the game changing implementation of the EU SFDR, the market is woefully unprepared for this landmark regulation,” said Andy Pitts-Tucker, managing director in consultancy group Apex’s ESG-dedicated division. “At this stage, all financial market participants and advisors should understand how it applies to them and be making the necessary preparations for the new regulation – however, this is far from the reality.”

He urged UK-based entities not to rely on Brexit as an “excuse” for unpreparedness. “While this regulation hasn’t been included as part of the Brexit onshoring process, many UK-based firms are likely to remain in the scope of the requirements in their capacity as alternative investment fund managers, for example when marketing funds into the EU or managing EU-based funds.

He said the first months of 2021 had seen more funds appoint specialist advisers and technology platforms to help them assess their sustainability strategies at the entity and product level.

The SFDR was part of the Commission’s two-part action plan for financing sustainable growth announced in March 2018, along with the CO2 benchmark regulation.

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