What advisers should know about the EU's ESG disclosure rules

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.

For example, the requirement to ensure a sustainability risk-related policy is in place, and to publish information on the integration of sustainability risks in the investment decision-making process on firms’ websites and in their pre-contractual documents.

The clamour for investment in ESG products has given rise to a new and separate ratings industry.

The EC confirmed that many firms which currently comply with non-financial reporting requirements under the EU Accounting Directive 2013/34/EU, or which adhere to international standards, should consider using that information to aid their compliance with the SFDR in the absence of the finalised technical standards.

The technical standards should be endorsed by the EC within three months of their publication (by 4 May 2021), and ESG Firms will be expected to comply with the technical standards from 1 January 2022.

The UK and Brexit impact

As already noted, the UK government has not implemented the SFDR in the UK, but will instead establish its own green taxonomy and ESG disclosure regime.

That said, UK firms may still be subject to the requirements in the SFDR to the extent that they market certain financial products in the EU.

For example, a UK fund manager may be required to comply with the SFDR if it markets fund products in the EU under the national private placement regime.

Additionally, UK portfolio managers acting under a delegation agreement with an EU fund manager may be contractually required to comply with certain requirements of the SFDR and the Taxonomy Regulation to facilitate the EU fund manager’s and/or fund’s compliance with the disclosure or internal procedures requirements imposed on them by the SFDR. 

UK regulations

On 9 November 2020, the Chancellor of the Exchequer announced various proposals for the financial services sector in the UK, to support the green economy.