Lynn Strongin Dodds looks at the reasons beyond the deadline extension and what firms need to do to prepare.
The European Commission has delayed the second phase of the Sustainable Finance Disclosure Regulation (SFDR) – this time by another six months to July 2022.
In a widely reported letter, John Berrigan, director general for the Commission’s financial services division, told the European Parliament and Council that the Commission had not been able to meet the deadline for adopting draft regulatory technical standards (RTS) submitted by the European Supervisory Authorities (ESAs) in February.
He said, “Due to the length and technical detail of those regulatory technical standards… we deem it necessary to facilitate the smooth implementation of the standards by product manufacturers, financial advisers and supervisors.”
The SFDR was introduced in March and requires asset managers to provide details on the sustainability credentials of their funds.
The aim is to standardise the way that ESG factors are reported across the continent, making it easier for investors to identify those firms which are truly meeting their obligations.
Under ‘Level 2 SFDR’, firms are required to report against a series of mandatory indicators divided by asset class, with investment companies obligated to report 14 indicators.
Asset managers will be required to divide their offerings into sustainable and non-sustainable as well as being subject to stricter reporting.
There will be three categories: funds, which integrate sustainability risks into advice or portfolio management decisions; products, which actively promote environmental or social characteristics, and those that have sustainable investment as their objective.
The RTS set out the rules for pre-contractual, periodic and website sustainability-related disclosures by asset managers, pension funds, and others.
They were due to be adopted by the third quarter and the disclosure requirements were set to go live from January 2022.
Separately, the ESAs are still working on the detailed rules for taxonomy-related disclosure requirements, which are supposed to amend the SFDR RTS from February.
The delay comes at a time when inflows into sustainable investments are skyrocketing across all major financial markets globally. The industry has grown to $35.3trn and now represents 36% of all professionally managed assets across the US, Canada, Japan, Australasia and Europe, according to a new report from the Global Sustainable Investment Review published by the Global Sustainable Investment Alliance (GSIA).
The most common sustainable investment strategy is ESG integration, with a combined $24.6trn in assets under management followed by the deployment of sustainable investment strategies including negative/exclusionary screening ($15.9trn) and corporate engagement/shareholder action ($10.47trn).
Gerhard Jovy, Managing Director and Partner at acarda, part of LPA Group, notes that despite the delay, the demand for ESG funds remains high and” that asset managers that are keen to manufacture and distribute these strategies simply won’t wait for the regulation to catch-up.”
He adds, “While any delay gives those firms impacted more time to respond, there is still much to do in order to disclose correctly. Firms can start right now by collecting ESG data and disclose product factsheets in a SFDR-compatible approach, ensuring they win ESG market share with best-in-class information at the heart of their fund offering, and be ready for next step of SFDR.”
Volker Lainer, VP of product management and regulatory affairs at GoldenSource, echoes these sentiments. He believes, “the delay provides some extra breathing room. It was always a tall order to expect the market to be ready with their ESG data set-up for phase two at the same time as the EU Taxonomy requirements. This is because SFDR requires firms to pool significant amounts of ESG data from a wide range of data providers.”
He says, “Also, firms are required to source data on incredibly niche metrics a difficult process that will take time to complete and subsequently manage into a usable format. The delay provides market participants with an opportunity to better look at SFDR and the EU taxonomy in conjunction so that they have a coherent implementation of these independent but related regulatory requirements.”
Industry groups have welcomed the news as they were sceptical whether firms would be able to cross the finishing line in time. In May, the European Fund Management and Asset Management Association (Efama) voiced its concerns and called on EU supervisors to extend the deadline, citing an unrealistic deadline, inconsistent reporting standards and high costs of procuring and processing data.
At the time, Dominik Hatiar, regulatory policy advisor at Efama, said, “If the amended RTS are adopted in Q3 2021, the timeline will not allow sufficient time to meet the new disclosure requirements ahead of the 1 January 2022 application date.”
“We urge the European Commission to provide for a transitional period in the first year of the taxonomy’s application to financial undertakings´ Level 2 disclosures, specifically Articles 5, 6 and 8 of the taxonomy.”
He added, “A transitional application of the new taxonomy-related RTS amendments currently consulted on would also limit the number of times pre-contractual documents will need to be updated and lead to more clarity for the end-investors.”