The Disclosure Regulation will apply as from 10 March 2021

Most provisions of Regulation (EU) 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (the SFDR) will apply as from 10 March 2021. The SFDR imposes a series of obligations on financial market participants to identify sustainability risks and to publish information on sustainability. It will apply to these participants and to products labelled as sustainable but also, to a lesser extent, to traditional financial products. Regulatory technical standards specifying the requirements of the SFDR should apply from 1 January 2022 onwards. Between 10 March 2021 and 1 January 2022, the requirements of the SFDR will have to be complied with in accordance with the general principles of the SFDR.

Scope

The SFDR applies to all "financial market participants" (i.e. mainly credit institutions and investment firms providing portfolio management services, insurance companies distributing insurance-based investment products, IORPs and fund managers (UCITS and AIFs)) and "financial advisers".

Main objective of the SFDR

The SFDR compels participants and advisers to publish reliable information on whether and how they consider in their investments:

  • sustainability risks, i.e. environmental, social or governance (ESG) events that may negatively affect the value of the investment (financial risk); and
  • adverse sustainability impacts, i.e. the medium or long-term risks of an investment in an activity which has an adverse impact on the social or natural environment (non-financial risk).

Main obligations of financial participants and advisers

The SFDR compels financial market participants and financial advisers to publish their policies regarding sustainability risk management on their websites (Article 3). They will also have to publish information on how these risks are integrated into their remuneration policies (Article 5).

In addition, financial market participants and financial advisers will have to publish on their websites a statement on the due diligence performed regarding the main adverse impacts of investment decisions (or advice) on sustainability factors, or at least explain why they do not take these adverse impacts into account (comply or explain). Participants or advisers who are part of a group with more than 500 employees (major participants) will have no choice but to describe the due diligence they have performed as from 30 June 2021.

Participants and financial advisers will have to explain in the pre-contractual documentation (KIID, prospectus, etc.) how sustainability risks are considered in their investment decisions or advice and the likely impact of these risks on product performance (Article 6). If they consider sustainability risks not to be relevant, participants will have to clearly explain the reasons for this assessment (comply or explain).

Major participants and financial participants and advisers who state that they have considered the adverse sustainability impacts of their investments must clearly explain, for each product they market, whether and how the product considers these adverse impacts (Article 7.1).

Main obligations attached to products

The SFDR targets three categories of investment products:

  • products which, without having a specific sustainability objective, promote environmental or social (ESG) characteristics, must be clear about how these characteristics are to be met (Article 8),
  • products which have a "sustainable investment" objective (as defined in Article 2(17)) are subject to specific disclosure requirements (Article 9) in order to make their comparison easier, and
  • more generally, any product or advice is subject to a pre-contractual information obligation, whether or not the product or service is labelled as sustainable (Article 6).

For investment products that promote, inter alia, ESG characteristics, the pre-contractual information must specify how the ESG characteristics are complied with and, if an index is designated as a reference benchmark, how this index is suitable. Furthermore, their periodic reports must describe the extent to which the ESG characteristics have been complied with.

For investment products with the objective of sustainable investment, financial participants and advisers must set out in the pre-contractual documents how this objective is to be achieved, either by setting out how the selected benchmark index is aligned with this objective or, if the objective is a reduction in carbon emissions, an indication of its compliance with the objectives of the Paris Agreement, as long as no EU "Climate Transition Benchmark" or EU "Paris Agreement Benchmark" index exists. Periodic reports should specify the overall sustainability impact of the financial product. If there is a benchmark index, the financial participant will also have to compare the performance of this index with another, broader market index.

Entry into force and RTS

The SFDR will apply to a large extent as from 10 March 2021. The periodic reporting obligations applicable to investment products labelled as sustainable will, however, only apply as from 1 January 2022.

The obligations imposed by the SFDR are to be specified in regulatory technical standards (the RTS). Draft RTS have been proposed by the European supervisory authorities (Joint report on draft RTS). They propose that the RTS should apply as from 1 January 2022.

The RTS will provide a clear and uniform framework for the following obligations:

  • the publication of information relating to the obligation for sustainable investments not to cause significant harm consistent with the publication of information on the adverse impacts of investment decisions or advice – for example, the RTS will specify the indicators to consider for the assessment and the measurement to be used (e.g. tonnes of hazardous waste generated/million euro invested);
  • the publication on the website of a statement on the due diligence to consider the adverse impacts of decisions or advice;
  • the pre-contractual information on products that have environmental or social characteristics – a template is provided for in the RTS;
  • the pre-contractual information on products for which a benchmark index has been chosen – a template is also provided for in the RTS;
  • the information published on the website that describes the environmental or social characteristics or the sustainable objective pursued by each product; and
  • the information on compliance with environmental or social objectives to be included in periodic reports.

In the meantime, financial participants and advisers will have to comply on these items with the general obligations imposed by the SFDR. However, they could already voluntarily apply the RTS as currently drafted. That is what the European authorities have suggested in a statement dated 25 February 2021 (Joint supervisory statement). The statement also specifies the date of entry into force of each provision.

Ongoing review of sector regulations 

Most sector regulations (including MiFID II, NFRD, AIFMD and UCITS) are currently being reviewed to better include sustainability risks and the pursuit of sustainable objectives. This review is taking place in parallel with the adoption of the SFDR and the Taxonomy Regulation. The coherence of the whole will only be achieved in a few years' time.

Jean-Marc Gollier
Simon Flament