The substantive provisions of the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) (the “SFDR”) will come into effect on 10 March 2021. The SFDR was introduced by the European Commission alongside Regulation (EU) 2020/852 (the “Taxonomy Regulation”) and Regulation (EU) 2019/2089 (the “Low Carbon and Positive Impacts Benchmarks Regulation”) as part of a package of legislative measures arising from the European Commission’s Action Plan on Sustainable Finance.
The SFDR introduces harmonised rules for financial market participants and financial advisers on transparency in relation to sustainability risks, the consideration of adverse sustainability impacts in their investment processes and the provision of sustainability-related information with respect to financial products.
The SFDR’s requirements are not solely applicable to financial market participants and financial advisers offering environmental, social and governance (ESG) related financial products, a wide variety of financial institutions, products and firms are impacted by the SFDR.
Requirements of the SFDR:
The SFDR imposes new transparency and disclosure requirements on certain firms, including requirements in the form of:
Website disclosures: Firms must disclose and maintain on their websites information relating to , the adverse effects of investment decisions on sustainability factors and information on how remuneration policies are consistent with the integration of sustainability risks. Additional information is required to be disclosed for ESG related financial products
Pre-contractual disclosures: Firms are required to update prospectuses and pre-contractual documents in order to disclose information in relation to the integration of sustainability risks into the decision-making process and the likely impact of sustainability risks on returns. Where sustainability risks don’t apply to the product, the reasons why must be set out. There are additional disclosure requirements where a financial product promotes ESG characteristics.
Periodic disclosures: Firms offering ESG-focussed financial products are required to incorporate details into periodic reports outlining how ESG characteristics are being met.
The SFDR obliges firms within its scope to consider how sustainability risks are incorporated into a firm’s investment decision-making process as well as how the remuneration of individuals is consistent with sustainability issues. Firms need to consider and potentially make internal strategic changes to their operating models before they can make the required disclosures under the SFDR.
While additional obligations are placed on firms offering ESG related products, the SFDR imposes obligations on financial market participants and financial advisors including AIFMs, fund management companies, self-managed UCITS, MiFID firms and credit institutions.
Delayed Regulatory Technical Standards (RTS):
The SFDR and the Taxonomy Regulation require joint development by EIOPA, ESMA and the EBA of most of the draft RTS. The European Commission has confirmed that the unprecedented economic and market stress caused by the Covid-19 pandemic has resulted in a delay in the finalisation of the draft RTS.
Notwithstanding this delay, the SFDR implementation dates are being maintained. Firms are therefore required to comply with the SFDR’s high-level and principle based requirements from 10 March 2021.
Prospectus Updates and the Central Bank:
The SFDR mandates the updating of prospectuses. The Central Bank of Ireland (the "Central Bank") has advised Irish Funds that it will put in place a fast-track process to address the volume of prospectus updates that will be required to be filed by firms under the SFDR obligations.
The Central Bank will provide for a fast-track filing process for prospectus updates based on the SFDR text in the absence of RTS. Prospectus updates limited to SFDR compliance will not be subject to post-authorisation review by the Central Bank under this process.
Irish Funds expects the Central Bank to issue follow-up communications in relation to the fast-track filing process shortly.
The introduction of the SFDR, the Taxonomy Regulation and the Low Carbon and Positive Impacts Benchmarks Regulation have implications for a wide variety of funds, financial advisors and financial institutions regardless of whether ESG-focused products are being offered by those entities.
The substantive obligations under the SFDR will come into effect from 10 March 2021, meaning that firms should take steps now to ensure websites and pre-contractual documentation are updated prior to that date. The periodic report disclosures will apply later from 1 January 2022.