Q&A on SFDR Delegated Regulation
July 2024 - The European Supervisory Authorities (ESAs) combined their SFDR Q&As into one Consolidated Q&A on SFDR.
ESAs Joint Opinion on the assessment of SFDR
The ESAs (European Supervisory Authorities - EBA,EIOPA and ESMA) published, on 18 June 2024, a Joint Opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR). The ESAs decided to deliver this Opinion on their own initiative.
The Opinion calls for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection, taking into account the lessons learned from the functioning of the SFDR.
The ESAs focus on ways to introduce simple and clear categories for financial products. The simplifications consist of two voluntary product categories, “sustainable” and “transition”, that financial market participants should use to ensure consumers understand the purpose of the products. The rules for the categories should have a clear objective and criteria to reduce greenwashing risks.
It is recommended that the European Commission consider the introduction of a sustainability indicator that would grade financial products such as investment funds, life insurance and pension products.
In addition, the Opinion also covers the following areas:
- appropriate disclosures for products outside the two categories to reduce greenwashing,
- improvements to the definition of sustainable investments,
- simplification to the way disclosures are presented to investors,
- other technical suggestions including on which products should fall under the scope of SFDR and on how to improve disclosures regarding the negative impact of investments on people and the environment, and
- the need for consumer testing before putting forward any policy proposals to review the SFDR, such as to introduce a categorisation system and/or an indicator.
ESAs recommendations to the European Commission
A full summary of the ESAs recommendations to the European Commission can be found on page 5 of the Joint Opinion.
Next Steps
The European Commission is assessing stakeholders’ responses to support policy considerations to improve the European framework for sustainable finance based on the experience on the implementation of SFDR.
The ESAs have strongly encouraged the Commission to undertake consumer testing when developing policy options to ensure there is a stronger evidence basis for changing the regulatory framework and to therefore more successful outcomes.
European Commission - Consultations on the implementation of SFDR
On 3 May 2024, the European Commission (EC) published the Summary Report of the Open and Targeted Consultations on the SFDR assessment. There was:
- Widespread support for the broad objectives of the SFDR but divided opinions regarding the extent to which the regulation has achieved these objectives during its first years of implementation.
- Consensus on the need to ensure consistency across the wider Sustainable Finance framework.
- Split views regarding the relevance of the SFDR entity level disclosures.
- Support for setting uniform disclosure requirements for all financial products offered in the EU as well as additional disclosures for products making sustainability claims.
- Strong support for a voluntary categorisation system regulated at the EU level.
- No clear preference for one of the two proposed approaches to a potential EU categorisation system.
- Differing opinions among respondents on the approach to be taken, commonly agreed principles for the categories and underlying criteria.
Background
In September 2023, the EC published a public consultation and a targeted consultation on the implementation of Sustainable Finance Disclosures Regulation (SFDR). The second consultation was targeted at stakeholders who were familiar with SFDR and had an in-depth knowledge and/or experience in the field of sustainable finance disclosures.
A recording of the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) high-level workshop "Sustainable Finance Disclosures Regulation (SFDR) - What next?", held on 10 October 2023, can be found here ". The objective of the workshop was to discuss current challenges of the SFDR and possible ways forward for sustainability disclosures in the EU.
On 15 December 2023, AREF has submitted its response to the targeted consultation. The response was based upon a model response for real estate which was put together by SFDR experts from several associations including AREF.
ESA's Review of SFDR Delegated Regulation regarding PAI and financial product disclosures
Following on from their Consultation from April to July 2023, the European Supervisory Authorities (ESAs) published, on 4 December 2023, their Final Report on draft Regulatory Technical Standards (RTS) on the review of PAI and financial product disclosures in the SFDR Delegated Regulation.
The European Commission will study the draft RTS and decide whether to endorse them within three months. These draft RTS would be applied independently of the comprehensive assessment of SFDR announced by the European Commission in September 2023 (see above) and before changes resulting from that assessment would be introduced.
AREF liaised with INREV on a response to the ESAs' consultation in respect of the suitability of the proposals for real estate assets. Please find here AREF's response which was submitted on 30 June 2023.
AREF webinar: Completing the SFDR process
AREF brought together experts in the completion of the SFDR process at a webinar for members on 13 October 2023. A recording of the webinar can be found here.
Guidance Advice: Application of SFDR Process for Real Estate Funds
To supplement the webinar on completing the SFDR process (see below), AREF has produced Guidance Advice: Application of SFDR Process for Real Estate Funds.
The paper has been put together by AREF members who have undertaken the SFDR process, but it is not a fully comprehensive list of requirements and each manager may interpret the regulations differently or use a different approach.
SFDR Real Estate Solutions Paper
AREF, INREV and IPF have jointly published a SFDR Real Estate Solutions Paper in which the challenges arising from SFDR for real estate investments are addressed. The Paper proposes potential remedies for challenges surrounding:
- Differences in the calculation methodologies between the TCFD’s recommendations and the SFDR
- Inconsistencies with energy performance certificate (EPC) ratings among EEA member states
- Confusion surrounding what should be included under the mandatory PAI “exposure to fossil fuels”
- Treatment of energy inefficient assets under the PAI
We would like to thank the following for their assistance in bringing this paper together:
Julie Townsend, Vice President - ESG Lead for Europe and Asia Pacific, PGIM Real Estate
Aleksandra Njagulj, Global Head of ESG Real Estate at DWS
Abigail Dean, Head of Strategic Insights at Nuveen Real Assets
Melville Rodrigues, Head of Real Estate Advisory at Apex Group
PRESS COVERAGE
IPE Real Assets Article 7 June 2023 - Real estate industry proposes solutions for problematic SFDR regulations
Answers from the European Commission on interpreting SFDR
13 April 2023 - The European Commission issued answers to questions posed by the European Supervisory Authorities (ESAs) on how to interpret some parts of the Sustainable Finance Disclosure Regulation (SFDR).
Delay in review of PAI indicators and SFDR financial product disclosures
October 2022 - The ESAs confirmed in a letter to the European Commission that there would be at least a six month delay in completing their review of the SFDR principal adverse impact (PAI) indicators and financial product disclosures. The European Commission had originally asked the ESAs to complete the review by 28 April 2023. However, the ESAs had identified significant challenges to deliver the required input in the time requested.
Clarification on draft SFDR RTS
June 2022 - The ESAs published a statement providing clarifications on the draft Regulatory Technical Standards (RTS) issued under the Sustainable Finance Disclosure Regulation (SFDR), which include the financial product disclosures under the Taxonomy Regulation.
The statement provides clarification on key areas of the SFDR disclosures, including:
- use of sustainability indicators;
- principal adverse impact (PAI) disclosures;
- financial product disclosures;
- direct and indirect investments;
- taxonomy-related financial product disclosures;
- “do not significantly harm” (DNSH) disclosures; and
- disclosures for products with investment options
European Commission adopts SFDR RTS
April 2022 - The European Commission adopted the Regulatory Technical Standards (RTS) to be used by financial market participants when disclosing sustainability-related information under the Sustainable Finance Disclosures Regulation (SFDR). More details, including the delegated regulations and annexes to the regulations, can be found here.
The requirements will now be subject to scrutiny by the European Parliament and the Council. They are scheduled to apply from 1 January 2023.
ESAs updated joint statement on the application of SFDR
March 2022 - The European Supervisory Authorities (ESAs) published an updated joint statement on the application of the Sustainable Finance Disclosures Regulation (SFDR). This seeks to mitigate the risk of divergent application of SFDR and Taxonomy Regulation within the period from 10 March 2021 (the application date of most of the provisions of the SFDR) to the application date of the Regulatory Technical Standards (RTS) of the SFDR.
ESA’s Final Report on SFDR RTS re. Taxonomy-related product disclosures
October 2021 - The European Supervisory Authorities (ESAs) published their Final Report on draft SFDR Regulatory Technical Standards (RTS) in relation to taxonomy-related product disclosures. This ensures the technical standards on disclosures rules function as a “single rulebook” for sustainability disclosures for both the original empowerments in the SFDR and the additional ones added by the Taxonomy Regulation. The report includes the updated RTS and the mandatory templates for the product disclosures; a feedback statement on the ESAs’ consultation published in March 2021; and the draft consolidated SFDR RTS.
European Commission’s response to ESAs' SFDR questions
July 2021 - The European Commission formally responded to the ESAs’ letter, sent in January 2021, requesting some clarification regarding SFDR.
Delay of SFDR RTS
July 2021 - The European Commission advised the European Economic and Financial Affairs Council (ECOFIN) and the Council of the EU, that they were deferring the date of application of the RTS by six months to 1 July 2022. In a letter, in November 2021, they confirmed there would be a further delay until 1 January 2023.
ESAs’ Taxonomy-related sustainability disclosures consultation
March 2021 - The ESAs published a consultation on Taxonomy-related sustainability disclosures. In responding to this consultation, AREF agreed with the ESAs’ aim to minimise duplication and complexity for sustainability disclosures by having the RTS on disclosures rules function as a “single rulebook” for the SFDR and for the Taxonomy Regulation. Also, AREF used the opportunity to reiterate to the ESAs the shortfalls with the indicators applicable to real estate investments within the SFDR RTS
ESAs' Final Report on RTS on Sustainability-related disclosures
February 2021 - the European Supervisors Authority (ESAs) delivered to the European Commission their final report including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation disclosures under the EU Regulation on sustainability-related disclosures in the financial service sector (SFDR).
The report included the ESAs response to their consultation last year, setting out the proposed Regulatory Technical Standards (RTS) on content, methodologies and presentation of disclosures under the Sustainable Finance Disclosure Regulation (SFDR). They acknowledged that the main list of indicators was tailored to investments in investee companies and have seen the merit in developing specific indicators for investments in sovereigns and real estate assets. The indicators for real estate could be found on pages 72 and 73 of the report. Also, they modified aspects of the RTS by separating impacts from investee companies, sovereigns and real estate.
In October 2020 the European Commission wrote to the European Supervisors Authorities (ESAs) regarding application of the Sustainable Finance Disclosure Regulation and the related technical standards. A link to their letter can be found here. In this they confirmed that financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021 although the RTS would be applicable at a later stage.
ESAs’ SFDR RTS consultation
April 2020 - The three European Supervisory Authorities (ESAs), the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) issued a consultation in on the proposed RTS for ESG disclosure.
AREF was wholly supportive of the SFDR but was of the view that the proposed RTS did not achieve the objectives of the SFDR for real estate as an investment asset class. Within our response to the consultation we raised concerns about the proposed approach in the RTS and have suggested a possible alternative approach.
AREF held a webinar that looked at the key issues and how AREF would respond. You can find the recording and slides on the website here.
We would like to thank the working group, overseen by the Public Affairs Committee and ESG & Impact Investing Committee for drafting our response to the consultation. In particular our thanks go to John Forbes and Paul Mora for all the effort they put into bringing it all together.
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