The Sustainable Finance Disclosure Regulation (“SFDR”), which was passed in 2019 and became applicable in 2021, has introduced Environmental, Social and Governance (“ESG”) reporting obligations for EU investment funds. These sustainability reporting obligations aim at reducing the marketing practice of greenwashing in the investment services industry.
However, whilst the SFDR provided for the obligation to carry out ESG reporting, the Regulatory Technical Standards (“RTS”), which stipulate how the data relating to the financial product is to be presented to investors, was not yet harmonised across the EU. Such omission to provide a harmonised methodology resulted in investors being unable to compare elements related to the environmental, social and governance of different financial products.
A practical example is: how does a fund investing in natural gas or nuclear power-plants disclose its environmental credentials? The Taxonomy Regulation did indeed provide a harmonised method of classifying ESG elements. However, in the absence of detailed Regulatory Technical Standards, that particular investment fund was at liberty to present the data according to its marketing strategy rather than following standardised EU guidelines.
Thus, the legal regime prior to the implementation of the RTS does not sufficiently allow ESG comparisons to be made amongst different financial products because reporting styles do not need to conform to a single harmonised EU methodology.
The first delay of these RTS was in June 2021 when the European Commission asked the European Parliament to delay SFDR Level 2 RTS until June 2022. The second delay was announced recently and provides for another 6-month extension until 2023.
In a circular dated the 22nd of April 2022, the Malta Financial Services Authority quoted the Delegated Regulation of the European Commission which stated that the final version of the RTS package had been passed to the European Parliament for scrutiny. Upon approval from the European Parliament, the RTS are scheduled to start applying from the 1st of January 2023.
The introduction of these RTS will provide fund managers with clear instructions on how to disclose the ESG elements relating to the SFDR’s reporting. Moreover, it will help investors (professional and retail alike) to be able to easily compare the environmental, social and governance elements of different investment funds and other financial products across the European Union.
This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact firstname.lastname@example.org