The RTS are set out in a new delegated act. A draft version of the RTS was published by the European Commission on 6 April 2022 and has now been officially published – without material changes – after scrutiny by the Council of Ministers and European Parliament. The RTS are based on the drafts developed by European financial regulators, the European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority, for adoption by the Commission.
The RTS supplement the 2019 Sustainable Finance Disclosure Regulation (SFDR)and provide guidance at a time when, in particular, ESG-branded financial products are coming under increased scrutiny.
The RTS further “specify the content, methodologies and presentation of information in relation to sustainability indicators with regard to climate and other environment‐related adverse impacts, to social and employee matters, to respect for human rights, and to anti‐corruption and anti‐bribery matters, as well as the presentation and content of the information with regard to the promotion of environmental or social characteristics and sustainable investment objectives to be disclosed in pre‐contractual documents, annual reports and on websites of financial market participants”.
In line with this, the delegated act also includes templates to be used by market participants for the statement on principle adverse sustainability impacts; pre-contractual disclosures for the Article 8 and 9 SFDR financial products, and; periodic disclosures for Article 8 and 9 SFDR financial products.
The delegated act will have legal effect from 14 August 2022 and come into force on 1 January 2023, but one expert has urged firms to take steps to understand the detailed requirements now and begin applying them to their sustainability-related reporting as soon as possible.
Dublin-based Gayle Bowen of Pinsent Masons said: “With 1 January 2023 five months away, managers need to urgently review the final RTS and start considering its provisions within the context of their website and product disclosures and also within the context of the periodic reporting requirements to ensure that they can be fully compliant by the required deadline.”
“The final RTS have not materially changed to those published last April and their finalisation gives managers more certainty when drafting their fund documents. The Central Bank of Ireland has indicated that it will allow a fast-track authorisation process in relation to the product level disclosures, which is a welcome development,” she said.
The new rules effectively bundle together 13 different sets of RTS that provide further clarity to the SFDR.
The SFDR requires defined ‘financial market participants’, including investment fund managers, to make a series of declarations and disclosures concerning the sustainability of the products they provide or funds they manage. The regulation, which took effect in March 2021, is designed to increase transparency over whether impact funds and other financial products invest in “environmentally sustainable economic activities, i.e. taxonomy-aligned activities”.
The SFDR provides for the development of RTS to specify the disclosure requirements - for the pre-contractual disclosure, website disclosure and periodic reporting - in detail. It was originally envisaged that these RTS would be set in time to come into effect at the beginning of 2022, but their implementation was postponed until 1 July 2022 and subsequently pushed back further to 1 January 2023.
Among the requirements under the SFDR, fund managers must decide whether they consider the principal “adverse impacts of investment decisions on sustainability factors” or where they do not, set out clear reasons as to why they do not, including information as to whether they intend to consider them in the future. Large fund managers, with more than 500 employees, are obliged, to consider those impacts and make disclosures in relation to them on their websites.
Among the disclosure requirements, fund managers must make a statement on their website of the due diligence policies they have in place with respect to the “principal” adverse impacts they identify, “taking due account of their size, the nature and scale of their activities and the types of financial products they make available”. There is also a duty to share information about their policies on the identification and prioritisation of principal adverse sustainability impacts and indicators, provide a description of the principal adverse sustainability impacts and of any actions in relation thereto taken or, where relevant, planned, and to specify their degree of alignment to the objectives of the Paris Agreement on climate change signed in 2015 by a number of global leaders, where it is relevant to do so.
Further sustainable finance disclosures must be made in pre-contractual information fund managers must share, as well as in relation to specific funds they operate. Special disclosure requirements also apply where the funds have sustainable investment as their objective.
The new delegated act bundling 13 RTS provides detail on how the various obligations can be met in practice.
EU regulators have said market participants must publish the first reports on the potential negative impacts of their products on environmental targets (PAI reports) for the year reporting period 2022 until 30 June 2023. All annual reports published or prepared from 1 January 2023 onwards will have to comply with the requirements outlined in the delegated act.