Disclosure Regulation – Ongoing updates of the regulatory technical standards

I.Introduction

Regulation (EU) 2019/2088, known as the Sustainable Finance Disclosure Regulation (“SFDR” or “Disclosure Regulation”) lays down sustainability-related disclosure obligations towards end investors for companies in the financial services sector. On 14 August 2022, the regulatory technical standards (“RTS”) accompanying the SFDR entered into force. The RTS define the requirements of the SFDR in greater detail.

Applicable since 1 January 2023, the RTS are continually being updated, and their implementation poses daunting challenges, including to insurers and brokers. The most recent amendments, found in Commission Delegated Regulation (EU) 2023/363, are directly applicable with no transition period for implementation. However, it is important that the requirements regarding comprehensive transparency do not impair the clarity of the disclosure. Otherwise, suspicions of “greenwashing” can arise.

II. Regulatory technical standards

The SFDR has been in effect since 10 March 2021 and has been amended once again by I Taxonomy Regulation, i.e. (EU) Regulation 2020/852. In particular, the European Supervisory Authorities (“ESAs”) were mandated to develop RTS. The Commission issued RTS in the form of Commission Delegated Regulation (EU) 2022/1288.

1. Drafting and updating

The RTS are wide-ranging and complex, which becomes obvious if only due to the amount of time needed to draw them up. The original plan was that the ESAs submit the draft RTS to the Commission by 30 December 2020. The RTS entered into force in August 2022 and have now been applicable since 1 January 2023.

The Disclosure Regulation stipulates that the ESAs update the RTS on an ongoing basis to reflect legal and technical developments. Accordingly, the RTS are constantly being reviewed and updated. The last update was brought about by Commission Delegated Regulation (EU) 2023/363, which entered into force on 20 February 2023 and governs changes regarding the annexes to the RTS.

2. Objectives

The main objective of the SFDR is to control investors’ investment behaviour. More transparency regarding environmental characteristics is intended to enable end investors to make informed investment decisions. For this purpose, the disclosure obligations towards end investors

• on the integration of sustainability risks,
• on the consideration of adverse sustainability impacts and sustainable investment objectives and
• on the promotion of environmental or social characteristics in investment decision-making and in advisory processes

are to be harmonised, thus improving the comparability of financial products. Disclosure obligations to be complied with in pre-contractual documents and periodic reports are intended to reduce asymmetries in information regarding the abovementioned factors.

The recitals of the RTS reveal that another express objective is to address concerns regarding “greenwashing”, which is generally understood as an attempt by organisations to present a “green” or “sustainable” image, particularly via communications and marketing, without actually systematically taking the corresponding sustainability-oriented action in their business operations (https://www.umweltbundesamt.de/greenwashing-sustainable-finance#greenwashing-im-kontext-von-sustainable-finance). Greenwashing can, for example, also be seen in the “green” purpose of a financing instrument. The comprehensive specification of disclosure obligations in the RTS is intended to combat this.

3. SFDR categories

The SFDR provides for various transparency levels for financial products that establish the degree of disclosure required in pre-contractual information. First, Article 6 of the SFDR deals with transparency for financial products that integrate sustainability risks or at least present the reasons why the financial market participants deem the sustainability risks not to be relevant. More extensive disclosure obligations apply to financial products that promote environmental or social characteristics (Article 8 SFDR) and financial products that have sustainable investment as their objective and for which an index has been designated as a reference benchmark (Article 9 SFDR).

4.Obligors

Pursuant to Article 42 of Directive (EU) 2011/61, the disclosure obligations apply to all financial market participants and financial advisors in the EU as well as asset managers and advisors outside the EU that sell their products to customers in the EU. This includes insurers that provide insurance investment products and/or advice regarding them. Insurance brokers that provide advice on insurance investment products are likewise subject to the disclosure obligations unless they have fewer than three employees.

5. Essential content

The RTS specify the content, methodology and presentation of pre-contractual information, information on the website and information in periodic reports that promotes environmental or social characteristics of sustainable investments. The information is to be provided free of charge and in a manner that is easily accessible, non-discriminatory, prominent, simple, concise, comprehensible, fair, clear and not misleading. The RTS provide indicators of the principal adverse impacts of investment decisions on sustainability factors. The indicators must be easily understood. To further strengthen the comparability of the information to be disclosed, the information on principal adverse impacts should relate to reference periods that run from 1 January until 31 December of the preceding year.

The annexes to the RTS include standard templates for

• the principal adverse sustainability impacts statement,
• pre-contractual disclosure for financial products and
• periodic disclosure for financial products.

The requirements placed on the content of the standard templates are explained in the RTS.

Despite the scope of the RTS, many questions remain unanswered. On its website, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin”) has stated that it intends to bring the financial companies’ questions regarding the RTS to the Joint Committee of the ESAs. The ESAs’ interpretation aids will be published in Q&A form. The ESAs published an extensive Q&A regarding the RTS on 17 November 2022 (https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2022/fa_bj_2212_Offenlegungsverordnung.html).

6. Challenges in practice

The Disclosure Regulation, including the RTS, poses special challenges for financial market participants and financial advisors. In practice, the complexity of the disclosure obligations often leads especially smaller insurance brokers to avoid further disclosure obligations by declaring that they do not take adverse sustainability impacts of investment decisions on sustainability factors into account in their investment or insurance advice.

Difficulties in implementation also result from insufficient access to data (https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2022/fa_bj_2212_Offenlegungsverordnung.html). Financial market participants and financial advisors depend on companies in the real economy to receive such data. Up to now, only large capital market-oriented companies with more than 500 employees have been legally obliged to provide extensive transparency on sustainability issues and to collect the relevant data. Smaller companies often do not even have such data regarding their own operations because they are not legally required to collect it.

BaFin emphasises that, from the perspective of financial market participants and financial advisors, the most important factor will be to master the art of walking the tightrope between comprehensive transparency and a clear and simple presentation of the relevant information. If the disclosure is not sufficiently clear or is too concise, suspicions of “greenwashing” can arise.

Finally, the changes to the RTS made by the new Commission Delegated Regulation (EU) 2023/363 do not provide for a transition period for implementation. In its Q&A, BaFin has stated that it expects financial market participants to make all reasonable efforts to fulfil the new requirements immediately. BaFin will take into account the new Regulation in its administrative practice as of 1 September 2023. This means primarily examining compliance with the requirements placed on pre-contractual information in Articles 8 and 9 SFDR.