As a general matter, the ESA Clarifications provide numerous, granular clarifications on a variety of other points covering:
- specific PAI indicators and their underlying calculation methodologies;
- pre-contractual disclosures;
- periodic disclosures;
- product-level Taxonomy disclosures; and
- disclosures for products with investment options.
The clarification to underlying PAI indicator calculation methodologies (concerning, e.g., energy consumption, emissions to water, gender diversity and pay gap indicators, and non-cooperative tax jurisdictions, the latter which must be determined by reference to the EU Council's list of non-cooperative jurisdictions) may be worth firms' review in order to align their internal processes with the ESAs' expectations (those internal processes could be used as part of the firm's opting-in to the PAI regime, the use of the PAI indicators to ascertain DNSH or more generally as useful proxies for negative externalities in a firm's investment programme more generally).
We comment below on certain specific aspects coming out of the clarifications. There are, however, numerous points of detail and firms may want to read the document itself.
Use of PAI indicators more generally
The ESA Clarifications:
- Confirm that the PAI indicators are distinct from sustainability indicators. However, as mentioned above, they can be used for the purposes of determining the attainment of E or S characteristics for an Article 8 fund or sustainable investment objectives for an Article 9 fund.
- Suggest that both direct and indirect investments should be included in the relevant calculations. Direct investments cover listed/unlisted equities, bonds, ABS and other types of debt. Indirect investments include investments in funds and fund-of-funds. Where the investment is for example an SPV, the firm can look through to the underlying assets to consider total adverse impacts arising.
Operation of the sustainable investment definition
The ESA Clarifications appear to indicate that the sustainable investment test for SFDR purposes is evaluated at the level of the investment rather than the constituent economic activities forming it.
Taxonomy alignment – a binding minimum commitment
The ESA Clarifications also indicate that a pre-contractual disclosure of Taxonomy-alignment should be understood as a minimum commitment that is binding; if there are any changes to the Taxonomy-alignment during the life of a product it is appropriate to consider how to update the pre-contractual disclosures. Further, where the disclosure of the Taxonomy alignment is calculated using capital expenditure or operating expenditure instead of turnover, that should be justified in the pre-contractual disclosure, including an explanation how it is appropriate for the product. Again, any changes to this, according to the ESAs, merit updates to the pre-contractual disclosures.
If you would like further information or assistance in understanding these publications or the sustainability regime more generally, please speak to your usual Travers Smith contact or any of the individuals below.