In her speech given on 31 May 2022, Verena Ross – Chair of the European Securities and Markets Authority (“ESMA”) – warned on the danger of greenwashing, as disclosures requirement under the Sustainable Finance Disclosure Regulation (“SFDR”) are too often used as product classification for marketing purposes. She especially raised concerns about “Art. 8 products”, for which we currently witness a phenomenon of “over-disclosure” which may mislead investors about the greenness of a product, and too the opportunity to remind investors to properly review the disclosures to determine the actual sustainability characteristics of a product.
The ESMA has done, together with the EBA and EIOPA (together “the ESAs”), significant work to clarify and guide the application of SFDR, with the aim of bringing a common approach and avoiding misleading disclosures.
On 13 May 2022, the ESAs submitted further SFDR queries to the European Commission (the “EC”), which subsequently provided its answers (please follow the link to our dedicated publication: https://www.cms-lawnow.com/ealerts/2022/05/the-esas-have-submitted-further-sfdr-queries-to-the-commission).
More recently, the ESAs published a supervisory briefing on sustainability risks and disclosures in investment management, promoting convergence with regard to how the national competence authorities supervise investment funds with sustainability features (Section 2).
On 2 June 2022, the ESAs also provided useful clarifications on several of the regulatory technical standards (“RTS”) issued under SFDR (Section 3).
2. ESAs’ supervisory statement: a common guide for NCAs
On 31 May 2022, the ESAs published a supervisory briefing aiming at providing guidance to National Competent Authorities (“NCAs”) regarding the supervision of sustainability-related disclosures and integration of sustainability risks, with the overall goal to increase transparency for investors as well as avoiding the practice of “greenwashing”.
Such guidance recommends to NCAs to particularly focus on the following items:
the compliance of the pre-contractual disclosures and periodic disclosures’ obligations through the creation of dedicated checklists of minimum elements to be included in such pre-contractual disclosures/periodic disclosures;
the coherence of the name of the funds which shall not be misleading;
the sustainable investment policy and/or objectives which shall be clearly identified, refraining from using generic and evasive expressions;
the key minimum elements to be covered by the investment strategy
the consistency and coherence between marketing documents and fund documentation;
the presentation of disclosures which shall be clear, succinct, fair and not misleading; and
the verification of integration of sustainability risks by all investment funds managers (“IFMs”).
Finally, the supervisory briefing also provides a list of examples of breaches of SFDR and reminds that NCAs remain fully responsible for determining which course of actions would be most effective and appropriate to mitigate supervisory risks and regulatory breaches.
3. ESAs’ clarifications on draft SFDR RTS – key elements
On 2 June 2022, the ESAs published clarifications on the RTS supplementing SFDR (the “Clarifications”). Although the EC adopted the combined RTS published by the ESAs respectively on 4 February 2021 and 22 October 2021 (the “ESAs RTS”) by approving a delegated regulation on 6 April 2022 (the “Delegated Regulation”), the Clarifications do not refer to the text of the Delegated Delegation but to the ESAs RTS.
The Clarifications intend to give guidance to the IFMs subject to SFDR, on key areas of the RTS such as the principal adverse impacts (“PAIs”), the Taxonomy-alignment disclosures and the “do not significantly harm” (“DNSH”) disclosures.
The ESAs provide a table summarising the three different ways in which the PAIs may be used.
First, the ESAs specify that the PAIs may be used to assess the attainment of the environmental and/or social characteristics promoted by the fund (for products framed within Art. 8 SFDR) or of the sustainable investment objective of the fund (for products framed within Art.9 SFDR). The ESAs explain that the use of PAIs for that purpose does not require the consideration of PAIs at the level of the entity (Article 4 SFDR) nor the product (Article 7 SFDR).
Secondly, the PAIs may be used for purpose of their consideration in line with Article 7 SFDR.
Thirdly, the ESAs clarify that PAIs may be used to demonstrate that an investment qualifies as a sustainable investment and fulfil the DNSH principle.
The ESAs position is in line with the confirmation provided by the EC that an IFM which does not consider PAIs at the level of the entity under Article 4 SFDR, may manage a product at the level of which PAIs are considered for the purpose of Article 7 SFDR.
In addition, the ESAs also clarify that the calculation of PAIs must include both direct and indirect investments and provide more guidance on the calculation methods.
Other key elements are covered by the Clarifications, including the opinion of the ESAs that the “minimum proportions” of Taxonomy-aligned investments are intended to be binding commitments, which means that failing them would lead to penalties provided under the national law. In Luxembourg, the sanctions for breaching SFDR provisions were enacted on 25 February 2022 and include pecuniary penalties ranging between 250 and 250,000 euros.
In the Clarifications, the ESAs underline that there is no direct link between the use of PAIs for the purpose of the DSNH principle and the PAI consideration under Article 7 SFDR, although both refer to the same indicators. Furthermore, he DSNH principle under the Taxonomy Regulation is not applied in the same way as the DSHN under Art 2(17) SFDR, as the DSNH under the Taxonomy Regulation should be read in line with the relevant Delegated Acts to the EU Taxonomy.
As stated by Verena Ross, the comprehensive nature of the disclosures is complex for investors to understand, and the technically challenging rules are difficult for the market to digest. The ESAs aim to simplify disclosures for investors and to address those challenges by producing more guidance.
While the above-mentioned materials already provide some useful clarifications on some key aspects on the application of SFDR, one will need to keep monitoring the ESAS’ upcoming publications on this hot topic. The ESAs notably plan to issue a comprehensive set of formal Q&As after the Delegated Regulation has been published on the Official Journal on the practical application of the rules and the additional taxonomy-related product disclosures.
 Investments which are defined as “environmentally sustainable investments” in accordance with the provisions of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”)