Legal Updates

Key Points to Note:

• The ESAs expect the prospectus of any in-scope fund to provide an “explicit quantification” of the extent to which the portfolio is taxonomy-aligned during the Interim Period.

• The ESAs confirm that estimates cannot be used to calculate taxonomy-alignment but that the use of “equivalent information” is permitted in certain circumstances.

Background

In February 2021, the ESAs published a joint supervisory statement¹ on the application of the SFDR² which was intended to provide national competent authorities and financial market participants with guidance on how to comply with the SFDR in the period between 10 March 2021 (being the application date for most of its provisions) and the date from which the related Level 2 measures were due to apply. This statement was intended to mitigate the risk of divergent application of the SFDR and to ensure an “effective and consistent application and national supervision of the SFDR”.

The ESAs have now published a joint updated supervisory statement (ESA Statement) on the application of the SFDR in light of the postponement of the entry into force of the related Level 2 measures (Level 2 Measures) until 1 January 2023. It also provides additional guidance around expectations about the disclosure of explicit quantification of the taxonomy alignment of financial products under Article 5 and 6 of the Taxonomy Regulation³ until the finalised Level 2 Measures enter into force on 1 January 2023 (Interim Period) and the use of estimates in calculating such taxonomy alignment.

Updated timeline

Consistent with the timeframe announced by the European Commission in November 2021⁴, the ESA Statement provides that the majority of the Level 2 Measures will apply from 1 January 2023. The ESAs indicate that until that date, the draft Level 2 Measures can be used as a reference for the purposes of applying the disclosure obligations set down under the SFDR itself, noting however that the draft Level 2 Measures may be subject to further change and that financial market participants should be encouraged by national competent authorities to “use the interim period until 1 January 2023 to prepare for the application of the RTS”.

Entity-level principal adverse impact reporting

The ESA Statement confirms that for those entities who choose or are required to comply with the entity-level disclosures of principal adverse impacts (PAI) under Article 4 of the SFDR, the PAI statement should be updated to address the finalised Level 2 Measures from 1 January 2023 but that the first information relating to a “reference period” should be disclosed in the PAI statement published on or before 30 June 2023 covering a reference period of 1 January 2022 to 31 December 2022.

Annual report obligations

The ESA Statement confirms that any annual reports published by a fund falling within the scope of Article 8 or Article 9 of the SFDR in 2022 must comply with Article 11 of the SFDR irrespective of the reference period covered. Consistent with the approach taken in their earlier supervisory statement, the ESAs also confirm that annual reports published in 2022 can use the related draft Level 2 measures “as a reference” for the purposes of complying with Article 11 of the SFDR.

Taxonomy-related disclosures

The ESAs have also taken the opportunity to clarify that in their view, any financial product falling within the detailed disclosure obligations set down in Article 5 and Article 6 of the Taxonomy Regulation should include an “explicit quantification” of the extent to which the relevant product can be considered taxonomy-aligned by using a “numeric disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned”. It remains to be seen whether the Central Bank of Ireland will require Irish domiciled funds whose documentation currently include only qualitative disclosures on taxonomy-alignment to update their documentation to include specific quantitative information in advance of 1 January 2023⁵.

Use of estimates in Taxonomy-alignment calculations

The Revised ESA Supervisory Statement confirms that estimates should not be used to calculate the taxonomy-alignment of in-scope financial products. However the ESAs do note that “where information is not readily available from public disclosures by investee companies, financial market participants may rely on equivalent information on taxonomy alignment obtained directly from the investee companies or from third party providers”.

If you have any questions relating to the possible implications of the ESA Statement on your existing arrangements, please get in touch with your usual Dillon Eustace contact.

Dillon Eustace LLP

28 March 2022

1 The original joint supervisory statement published by the ESAs on 25 February 2021 is available from https://www.esma.europa.eu/sit...
2 Regulation (EU) 2019/2088
3 Regulation (EU) 2020/852
4 https://www.esma.europa.eu/sit...
5 Under the Level 2 Measures, which apply from 1 January 2023, quantitative information on taxonomy-alignment of the relevant fund must be presented to investors in a pie-chart format.