The EU Regulation on sustainability (environmental, social and governance) disclosures for certain financial services sector firms (the SFDR) came into force on 19 December 2019 and will apply from 10 March 2021.
However, with the UK having left the EU and the transitional period having come to an end, how relevant is the Sustainable Finance Disclosure Regulation (SFDR) for the UK?
Initial drafts of the Financial Miscellaneous Amendments (EU Exit) Regulations 2020, published on 6 May 2020, provided for the SFDR to apply in the UK after the transitional period, but only in part.
Critically, the financial product-specific disclosure requirements in article 7 (transparency of adverse sustainability at the financial product level) and the disclosure templates developed by the EU in the level 2 technical standards would not be adopted by the UK.
In the end, even that partial application of the SFDR was dropped, as the UK government elected not to implement the SFDR or the Taxonomy Regulation in UK legislation.
Instead, it has vowed to establish its own domestic green taxonomy and ESG disclosure regime.
The SFDR requires financial market participants and financial advisers (together, ESG Firms) to provide clients and investors with certain ESG-related information in relation to the provision of their services and the marketing of certain financial products, using the mandatory disclosure templates (where applicable).
The disclosures are required to be made in pre-contractual information communications, on ESG Firms’ websites and in periodic reports (as required under relevant sectoral regulation).
Additional disclosures are also required where the financial products that are marketed are specifically ESG-related.
This will require ESG Firms to make changes to their internal procedures and policies in order to comply with these new requirements, including ensuring that they have the necessary processes in place to capture the information and/or data that is required to make the SFDR-mandated ESG assessment.
While the SFDR does not make it compulsory to provide training to employees on the new disclosure regime, it is inevitable that relevant persons (for example, client-facing financial advisers and senior managers with ultimate responsibility for compliance with the SFDR) will require, and should be provided with, training on these significant regulatory changes.
ESG Firms must be compliant with the majority of the SFDR from 10 March 2021, with periodic reporting requirements applying from 1 January 2022.
The SFDR will be supplemented by Level 2 technical standards, which will provide additional details regarding the content and presentation of some of the information that needs to be disclosed, including the mandatory disclosure templates for pre-contractual and periodic product disclosures.
The technical standards were due to be published on 31 December 2020, and consequently to take effect from 10 March 2021.
However, the final drafts were not published by the European Supervisory Authorities until 4 February 2021.
In accordance with the European Commission’s (EC) recent letter, while compliance with the technical standards has been delayed, ESG Firms are still expected to comply with the substantive provisions in the SFDR from 10 March 2021.