Sustainable Finance Disclosures Regulation (SFDR)
The Regulation on sustainability-related disclosures in the financial services sector (Sustainable Finance Disclosures Regulation or SFDR) became applicable on 10 March 2021. The SFDR introduces new disclosure obligations for insurance intermediaries providing advice with regard to insurance-based investment products (IBIPs) and investment firms in order to integrate sustainability factors in their investment decisions and advice processes, as part of their duty to act in the best interest of clients. SFDR provides for an exemption from its scope for self-employed and entities with less than three employees. Member States may decide to opt-out from this exemption.
These sustainability-related obligations apply to all financial products as defined in SFDR, including IBIPs, portfolio management, pension products and PEPPs, regardless of whether or not they are designed as “green” products with an ESG profile (Environmental, Social and Governance).
Insurance and financial intermediaries must:
In February 2021, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published their draft Regulatory Technical Standards (RTS) on the content, methodologies and presentation of disclosures under the SFDR. The draft RTS aim to better protect retail investors by improving the Environmental, Social and Governance (ESG) disclosure on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products (“light green” and “dark green” products). The aim is also to help financial market participants and financial advisers to respond to investor demands for sustainable products and reduce the risk of greenwashing. The ESAs have proposed in these draft RTS that the application date of the RTS should be 1 January 2022.
The European Commission is required to endorse the RTS within 3 months of their publication. Subject to the non-objection by the European Parliament and Council – within 3 months following the Commission’s endorsement – the RTS will be adopted by the Commission by means of a delegated regulation.
In February 2021, the three ESAs also published a joint supervisory statement on the application of the SFDR. As the SDFR started to apply on 10 March 2021, while the above-mentioned RTS on the content, methodologies and presentation of sustainability-related disclosures are still under finalisation, the statement aims to achieve an effective and consistent application and national supervision of the SFDR, promoting a level playing field and protecting investors. The supervisory statement focuses on the periodic disclosures for financial products marketed as green, which is an obligation imposed to the product manufacturers. It also focused on the entity-level disclosures in relation to principal adverse impacts to be made by large financial market participants with more than 500 employees.
Amendments to IDD & MiFID II
On 21 April 2021, the European Commission published its amendments to the IDD Delegated Regulations (DR) in relation to IBIPs and POG (EU 2017/2358 and EU 2017/2359) for insurance intermediaries. The objective of these amendments is to integrate sustainability (environment, social governance) factors and preferences into the product oversight and governance (POG) requirements for insurance undertakings and insurance distributors as well as into the rules on conduct of business (namely conflicts-of-interest) and on information requirements applicable to the distribution of IBIPs.
Together with the IDD amendments, the Commission also published its amendments to the MiFID II Delegated Regulations (DR) in relation to organisational requirements and operating conditions for investment firms (EU 2017/565) and in relation to POG requirements (EU 2017/593). The objective is again to integrate sustainability (environment and social governance) factors, risks and preferences.
These Commission's Delegated Regulations are now under scrutiny by the European Parliament and the Council of the EU (3 months extendable to 6 months). If there is no objection, the Commission Delegated Regulations is expected to start to apply as of October 2022.
According to these amendments, insurance intermediaries distributing IBIPs and investment firms providing financial advice should proactively ask their (potential) customers about their sustainability preferences. In accordance with their obligation to act in the best interest of their customers, recommendations to clients and potential clients should reflect both the financial objectives and any sustainability preferences expressed by those clients. It is clarified that, in order to avoid mis-selling practices and misinterpretations, insurance intermediaries distributing IBIPs and investment firms providing investment advice should first assess a customer’s/client’s other investment objectives, time horizon and individual circumstances, before asking for his or her potential sustainability preferences.
Taxonomy for sustainable economic activities
Taxonomy is a “green list” – a classification system for sustainable economic activities – that aims to create a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment. The Regulation on “the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088”, the so-called Taxonomy Regulation, will start to apply on 1 January 2022 as regards the (1) and (2) environmental objectives (climate change mitigation and climate change adaptation) and on 1 January 2023 as regards the (3), (4), (5) and (6) environmental objectives.
In March 2021, the three ESAs launched a Consultation Paper on draft Regulatory Technical Standards (RTS) regarding disclosures of financial products investing in economic activities that contribute to an environmental investment objective (taxonomy-aligned). The taxonomy-related RTS address disclosures that product manufacturers providing taxonomy-aligned products should make, i.e. which environmental objectives (as laid down in the taxonomy) the investments of the product contribute to, and how, and to what extent, the activities funded by the product are Taxonomy-aligned. The RTS create a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation by amending the draft RTS under the SFDR (see above) to minimise overlapping or duplicative requirements between the two Regulations.
The ESAs final report with RTS is expected to be published by late June or in early July 2021.
EU Green Bond Standard
Under the umbrella of the Taxonomy, the European Commission will publish a proposal for an EU Green Bond Standard (EU GBS). The Technical Expert Group on Sustainable Finance set up by the European Commission (TEG) published in June 2019 its report on an EU GBS with 10 recommendations for the establishment of an EU GBS based on current best market practices. The TEG recommended the creation of an official voluntary EU GBS building on the EU Taxonomy. On 9 March 2020, the TEG published its usability guide for the EU Green Bond Standard.
EU Ecolabel for retail financial products
The Joint Research Centre (JRC), the Commission’s in-house science service, has published its 3rd draft Technical Report proposing EU Ecolabel criteria for retail financial products, mainly PRIIPs and IBIPs. The EU Ecolabel criteria will determine which products are sufficiently “green” to be awarded with the EU Ecolabel by competent bodies following a verification process. The criteria shall be based on the best products available (10-20%) on the Community market in terms of environmental performance throughout the life cycle according to the EU Ecolabel Regulation 66/2010.
The EU Ecolabel for retail financial products is a voluntary award scheme intended to promote products with a reduced environmental effect and to provide consumers with accurate, science-based information on the environmental impact of products. This voluntary scheme applies to manufacturers of the financial products. Following the final JRC Technical Report, the European Commission will decide whether to adopt a legislative proposal expected by Q4 2021.