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Further guidance on the interpretation of SFDR and the Taxonomy Regulation

Further guidance on the interpretation of SFDR and the Taxonomy Regulation


On 25 May 2022, the European Commission (Commission) issued its response to the  European Supervisory Authorities' (ESAs) questions on the interpretation of the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation (Taxonomy Regulation) of 13 May 2022.  

Many of the ESAs' questions to the European Commission related to points which are actively being considered by financial services firms.  The Commission does provide some substantive responses but, in a number of cases, the responses are rather incomplete or ambiguous.  As such, firms and industry associations may want to spend some time digesting the impact the questions and responses have for their businesses in order to respond in a way which is both measured and considered.

The key areas where there has been some useful clarification (although not necessarily the answer that firms had been hoping for) include:

  • the application of the SFDR's disclosure requirements to products which existed pre-SFDR and/or are no longer being made available to new investors;
  • the application of the Taxonomy Regulation to Article 8 and Article 9 products; and
  • the principal adverse impact (PAI) regime.

It appears that the ESAs' questions were originally sent to the Commission in December 2021 and the Commission adopted its response on 13 May 2022 but did not make this public until 25 May 2022.  Given firms' need for clear, practical guidance in this complicated area, it is unfortunate that firms did not have more information on these at an earlier date or have the opportunity to influence the debate through industry advocacy. 

We discussed the ESAs' questions in our previous briefing and set out an overview of the Commission's responses below.

  • Application to existing and no longer available products: The Commission confirms that SFDR applies to financial products (including managed portfolios) which were in existence at 10 March 2021 (when SFDR came into force), including financial products which were no longer made available to investors at 10 March 2021. Therefore, the SFDR periodic disclosure requirements apply to all financial products for which periodic reports are prepared, e.g. under AIFMD, including financial products where marketing had ceased prior to 10 March 2021.  Similarly the website disclosure requirements will also apply to those financial products.  This will be something of a disappointment to many firms who had hoped that a more pragmatic solution might have been found given the practical difficulties in obtaining the information to make disclosures in respect of such products.  Firms will need to consider what if anything this means for funds which were closed to new investors as at 10 March 2021.

  • Taxonomy Regulation and Article 8 products:

    • The Commission also confirms that a financial market participant must make the pre-contractual disclosures in the Taxonomy Regulation for an Article 8 product which promotes environmental characteristics even if it does not commit to investing in any economic activities contributing to an environmental objective. Such firms will, however, be able to report taxonomy-alignment as zero.  This is a broader interpretation than many firms had been hoping for and will capture both Article 8 funds which commit to make a minimum proportion of sustainable investments (referred to in industry as "mid-green" Article 8 products) and also those which do not make such a commitment but have other environmental characteristics (referred to in industry as "light-green" Article 8 products). 
    • For Article 8 funds which promote environmental characteristics, where the product’s investments change over time during the financial product’s lifetime and also include investments in economic activities that contribute to an environmental objective, the Commission states that this should be reflected in the pre-contractual documentation. This raises a question about whether firms may be expected to issue amended and updated pre-contractual documentation to existing investors and how firms can manage this risk.

  • Taxonomy Regulation and Article 9 products: Financial market participants will also be obliged to make the disclosures in the Taxonomy Regulation for an Article 9 product which only committed to investing in economic activities contributing to social objectives and is later determined to have, in fact, invested in economic activities contributing to an environmental objective.  This appears to put social Article 9 products in a very different position from social Article 8 products and arises from a strict reading of the Taxonomy Regulation. 

  • PAI disclosures:
    • The ESAs queried whether financial market participants could consider and disclose PAI at product level for some financial products but not at entity level. The Commission's response is rather ambiguous. It confirms that a financial market participant may manufacture a financial product that pursues a reduction of negative externalities (which is as expected).  It also states that PAI information must not be part of the entity level information regarding adverse impacts. 

    • The ESAs also asked whether financial advisers are required to collect information from non-financial companies in order to make any principal adverse impact disclosures. The response provided by the Commission does not specifically answer this point but seems to imply that they would be required to do so.

  • Non-SFDR products: The Commission has confirmed that some of the SFDR disclosure obligations apply to the provision of MiFID investment advice in relation to financial instruments generally, which is broader than financial products which are in scope of SFDR. This is as expected.

  • Good governance:

    • The Commission confirms that a financial product may continue to fall within Article 8 or 9 SFDR if it does not invest in companies with good governance but that it would be in breach of Article 8 or 9. This could potentially allow Article 8 or 9 products to invest in companies which do not meet the good governance requirements without the product being reclassified.  

    • The Commission has also confirmed that the requirement for good governance practices only relates to companies and does not apply to government bonds.

  • MiFID II disclosures: As regards the question of whether financial advisers must make pre-contractual disclosures on the integration of sustainability risks before the client is bound by an agreement for any type of MiFID II investment advice or just investment advice in respect of financial products falling under SFDR, the response is rather unclear but suggests that the Commission does not distinguish between the two types of advice. Therefore a cautious interpretation would be that financial advisers must make pre-contractual disclosures on sustainability risks prior to entering into an agreement for any type of investment advice.

  • Definition of "employ" and "employee": The Commission clarifies that part-time employees are to be treated as employees for the purposes of the exemption in Article 17 SFDR for certain advisory firms that employ fewer than three persons. However, it does not provide any guidance on the treatment of other types of workers such as self-employed staff or owner managers.

If you would like further information or assistance in understanding the guidance, or the EU sustainability regime generally, please speak to your usual Travers Smith contact or any of the individuals below.

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