The ESAs have submitted further SFDR queries to the Commission

25 May 2022

I. Background

While Level 1 of the Sustainable Finance Disclosure Regulation (“SFDR”) has been applicable for over a year, the investment funds managers have been facing uncertainties with regards to the timing and interpretation of the SFDR Level 2 requirements, set out as regulatory technical standards (“RTS”).

On 14 July 2021, the European Commission answered four questions that were submitted by the European Supervisory Authorities (“ESAs”) in relation to SFDR, which clarified namely the application of SFDR to sub-thresholds’ AIFMs and the concept of “promotion of environmental and social characteristics” under Article 8 SFDR.

Further guidance was brought by the European Commission’s approval of the RTS into a single Delegated Regulation, on 6 April 2022. As the RTS are expected to enter into force on 1 January 2023, the ESAs submitted further SFDR queries to the Commission on 13 May 2022, expecting to receive more clarifications prior the application of the RTS.

II. Key takeaways

The ESAs submitted nine questions, with the aim of helping the market preparing for the formal application of the Level 2 requirements.

1) Question on PAI

The first question relates to the consideration of principal adverse impacts on sustainability factors (the so-called “PAI”) at product level, when the PAIs are not considered at the level of the investment fund managers.

The answer of the European Commission on whether or not this is possible under SFDR would have an impact on the fund industry in Luxembourg. A large proportion of fund promoters indeed engage with an external AIFM to manage their products. Depending on the answer of the European Commission, the consideration of PAI by the manager would potentially become a criterion of selection of the third-party AIFM. 

2) Questions related to Financial Advisors

Where the provisions on financial advisers were previously rather minimal in the different publications from the ESAs and the European Commission, today the ESAs are requesting clarification on their activity under SFDR by dedicating four questions to financial advisors.

The questions namely relate to (i) the provision of investment advice under Directive 2014/65/EC (“MiFID II”) and the disclosures obligation under Art 6(2) SFDR, (ii) the scope of application of SFDR to some financial advisors, (iii) the level at which the PAIs must be considered and (iv) the exempted insurance intermediaries covered by Article 17 SFDR.

As of 2 August 2022, financial advisors, who are MiFID investment firms, would indeed have to comply with additional obligations in relation to the integration of sustainability factors and the “sustainability preference” of their clients into their operational and advice activities. In that context, further clarification on the impact of the new provisions of MiFID II and Level 2 SFDR for financial advisors would indeed be welcomed.

3) Questions related to products no longer made available

When SFDR Level 1 entered into force, the question was asked by investment fund managers whether they were expected to comply with the SFDR requirements at the level of their products which were no longer made available on 10 March 2021.

While most of the market players agreed that the disclosures related to these funds did not have to updated, the ESAs is seeking today clarity on (i) the application of Article 6 and 7 with regards to these products and (ii) the update and delivery of their pre-contractual, website and periodic disclosures under Articles 6, 7, 10 and 11 SFDR to existing investors.

Depending on the answer of the European Commission, some investment fund managers may have to prepare themselves to update the documentation related to funds that were no longer marketed prior to 10 March 2021.

4) Question related to the Taxonomy disclosures

The ESAs are requesting clarification on the application of the Taxonomy-related disclosures (As contained in the Taxonomy Regulation), to (i) Article 8 products which are not investing in “sustainable investments” under Article 2(17) SFDR and (ii) Article 9 products which only commit to invest in economic activities contributing to social objectives.

By definition, those two types of products are indeed not investing in economic activities which would be eligible to align with the EU Taxonomy.

III. Conclusion

As the date of application of Level 2 requirements approaches, the investment fund managers are facing several difficulties related to the interpretation of some SFDR provisions and the questions sent by the ESAs would address most of them. Answers from the European Commission in a timely manner would be appreciated by investment fund managers who intend to tackle the implementation of Level 2 SFDR in due course.

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Jargon Buster

Agency Database