EFAMA outlines six ways EU can improve sustainable disclosure regime

In response to a joint ESA consultation, EFAMA calls for consistency, social inclusion and a transition period

The European Fund and Asset Management Association (EFAMA) has called for consistency across EU’s sustainable finance regime, with a particular focus on disclosures, while also urging policymakers to implement a transition period on concerns there isn’t sufficient time to meet 1 January 2022 requirements.

EFAMA has published its response to the joint European Supervisory Authorities (ESAs) consultation on taxonomy-related sustainability disclosures in the Sustainable Finance Disclosure Regulation (SFDR). ESAs invited industry feedback to its consultation paper released in March drafting regulatory technical standards with regard to the content and presentation of sustainability disclosures.

The updated Regulatory Technical Standards (RTS) in the consultation report proposed the following:

  • Pre-contractual information should include details on how a product with environmental or social characteristics/sustainable investment objectives meets those characteristics or objectives.
  • Information on the environmental or social characteristics of financial products/sustainable investment objective of the product and the methodologies used on the entity’s website .
  • Periodic reports specifying: (I) the extent to which products met the environmental and/or social characteristics using the list of relevant indicators; and (II) for products with sustainable investment objectives, including products whose objective is a reduction in carbon emissions.
  • Information in relation to the ‘do not significantly harm’ principle: specifying the details for how sustainable investments within the product do not have an adverse impact.

It also introduced a link between the SFDR and the Taxonomy Regulation, called “double materiality requirements”.

In its response, EFAMA said authorities should be applying “full consistency” across taxonomy-related sustainability disclosures in the Sustainable Finance Disclosure Regulation (SFDR), the Article 8 Taxonomy Delegated Act and the portfolio greenness formula in the EU Ecolabel for retail financial products, or face further confusing the market.

It addressed six key issues:

  • Timeline-related implementation challenges – EFAMA highlighted if the taxonomy-related amendments to the SFDR RTS are finalised only after the Commission endorsed the initial SFDR RTS submitted by the ESAs in February, the technical standards would not be endorsed as a single rulebook. “This could result in two sets of RTS coming into force at different times, thereby confusing the market,” EFAMA said.
  • Key performance indicators (KPI) – The amended RTS should seek consistency with the KPI specifications provided under the forthcoming Delegated Act under Article 8 of the Taxonomy Regulation. EFAMA said it does not have a clear preference between the ESA´s preferred approach of choosing either Turnover or CapEx at the product level on the one hand, and the blended KPI of both indicators, consistent with the methodology used in the EU Ecolabel for retail financial products, on the other hand.

“While the ESA´s approach has clear advantages in terms of comparability and clarity for end-investors, a blended KPI would provide a more accurate figure of taxonomy alignment for funds investing in both green and transitioning companies. In principle, EFAMA believes financial undertakings should be allowed to choose either indicator (Turnover or CapEx), depending on which indicator is more relevant to a particular sector or company.

“This flexibility is essential for CapEx-based sectors, such as real estate, and for the objective of climate adaptation since turnover cannot be recognised for adapted activities, as outlined by the Technical Expert Group.”

  • Assets not covered by the Taxonomy – The Commissions’ approach to non-assessable assets, such as sovereign bonds, cash or commodities needs to find a balance between the principles of comparability, conciseness, and relevance, EFAMA suggested. “While a mandatory inclusion of all assets might boost comparability, it will also significantly dilute the taxonomy alignment ratio and unduly penalise funds with high exposure to assets that have no chance of becoming taxonomy aligned,” it said, and recommended the proportion of non-assessable assets be disclosed as a secondary indicator.
  • Periodic disclosures – EFAMA also urged the authorities to consider a transition period: As companies begin to report their taxonomy alignment only in 2022, the periodic disclosures Level 2 requirements should only enter into application in 2023 given that investors will not have the data available for periodic disclosures until 2022.”
  • Templates for products with social objectives – EFAMA also pointed out that products with a social objective may be at a disadvantage as the as the Taxonomy is not yet complete and currently focused on climate. EFAMA said: “Current products with a social objective would be required to mark the box ‘not aligned with the EU Taxonomy’, negatively affecting the products’ distribution. We suggest offering an option where product teams can indicate whether products pursue social or environmental objectives.”
  • Data costs – Finally, EFAMA said a ”high burden” is being placed on the Financial Market Participants to comply with the SFDR and taxonomy disclosures requirements when accurate, consistent, and comparable data on taxonomy alignment is not available. “Due to the market concentration amongst ESG data, research and rating providers, there is a risk for high fees being charged by taxonomy data providers, leading to increased costs for end-investors and creating barriers to entry for new players and sustainable investors,” it said.

Dominik Hatiar, regulatory policy advisor at EFAMA, further commented on the timings of the new legislation: “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.

“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”.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...