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    ESAs Clarify Key Areas of Regulatory Standards Under SFDR

    June 02, 2022

    The three European Supervisory Authorities (ESAs) issued a statement providing clarifications on the draft regulatory technical standards under the Sustainable Finance Disclosure Regulation (SFDR: Regulation 2019/2088), including the financial product disclosures under the Taxonomy Regulation.

    This recent statement is part of the ESAs’ (EBA, ESMA, EIOPA) ongoing efforts to promote a better understanding of disclosures required under the technical standards of the SFDR, ahead of the planned application of the rules on January 01, 2023; the rules are laid out in the Delegated Regulation adopted by the European Commission on April 06, 2022. The statement provides clarification on key areas of the SFDR disclosures, including:

    • use of sustainability indicators
    • principal adverse impact disclosures
    • financial product disclosures as well as direct and indirect investments
    • taxonomy-related financial product disclosures
    • “do not significantly harm”  disclosures
    • disclosures for products with investment options

    The ESAs clarify that the “sustainability indicators” and the indicators for principal adverse impact referred to in Article 4 SFDR and Chapter II & Annex I of the draft regulatory technical standards in the ESAs’ final reports refer to different disclosures under the SFDR. However, it is possible to use the indicators for principal adverse impact to measure the environmental or social characteristics or the overall sustainable impact of the financial product, for example, by showing improvements of the investments against those indicators over time. For calculation of indicators on greenhouse gas emissions, ESAs note that in some cases an investee company’s emissions may change throughout a reference period and the size of the investment in that company may evolve too. Thus, for the purposes of the disclosures of principal adverse impacts of investment decisions on sustainability factors, the impact assessment should be based on, at least, the average of four calculations made on March 31, June 30, September 30, and December 31 of a calendar year reference period. ESAs also clarify that disclosure of the top holdings of the product in the periodic disclosures for financial products should be understood to require the identification of the country in which the investment is made or the investee company is headquartered or where a financial product is domiciled.

    With respect to the taxonomy-related financial product disclosures, ESAs clarify that the taxonomy-alignment of the aggregated investments should be represented in the form of a bar chart, and be expressed by turnover, capital expenditure and operating expenditure. Furthermore, the disclosures require a breakdown of the proportion of each of the environmental objectives set out in Article 9 Taxonomy Regulation to which the sustainable investments contributed. Furthermore, ESAs consider that the calculation of the Taxonomy-alignment of a financial product investing in another financial product (including funds of funds) should be based on the market value of the proportion of Taxonomy-aligned investments of the latter. Overall, the ESAs note that they will continue to promote a better understanding of the regulatory technical standards as adopted in the Delegated Regulation under the SFDR through practical application questions and answers, after the publication of the Delegated Regulation in the Official Journal of the European Union.


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    Keywords: Europe, Banking, Insurance, Securities, ESG, Climate Change Risk, Sustainable Finance, Disclosures, Basel, Pillar 3, SFDR, Taxonomy Regulation, Regulatory Technical Standards, ESAs

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