The WeeFin teams have studied each of these changes to offer you a summary of the main information to remember and help you to see more clearly.
1. The time has come: a consultation on the long-awaited revision of SFDR Level 2 has been published!
The European Supervisory Authorities (ESA) published on April 12 a " Consultation Paper "on the revision of the SFDR level 2. The European authorities expect feedback on these proposals by July 4. This publication is in line with the timing that has been discussed for several months in the market, notably by the AMF, which could lead to the implementation of these revisions on January 1, 2025.
Here are the 3 main changes related to this text:
- A proposal to revise the pre-contractual and periodic appendices with, in particular, the appearance of a dashboard on the first page of the appendix and the disappearance of the table on asset allocation. In terms of content, we note the appearance of a new section on decarbonization objectives.
- The text clarifies certain methodological points: the communication linked to the DNSH, the calculation of derivatives within the framework of the PAI and the definition of "Equivalent information". To find the details, click here.
- The introduction of new mandatory social PAI indicators on various topics such as tobacco, tax issues, interference with worker representation and wages.
A first deciphering, made by WeeFin experts, is already available here!
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2. Q&A SFDR: Sustainable investment and IPAs: European Commission clarifications remove vagueness, but leave room for manoeuvre for financial actors
On April 14, the ESAs published the long-awaited answers from the European Commission to the questions posed in September 2022 on sustainable investment, the BAP and BTC indices and the consideration of IAPs.
On the whole, the responses are useful and have not led to a tightening of standards as had been feared. On the contrary, the European Commission has reminded us on several occasions that the methodological choices remain in the hands of the financial actors.
Here are the 5 key points to remember:
- The European Commission does not set minimum requirements for qualifying concepts such as positive environmental/social contribution, DNSH or good governance, i.e. the conditions for qualifying a "sustainable investment", leaving it to financial actors to make their own assessment for each investment and disclose their underlying assumptions.
‍ - It is possible to invest in activities that are sustainable in nature, activities conducted in a sustainable manner, and activities in transition. For the latter, sustainable investments must comply with the DNSH and good governance test today (future improvement plans would not be acceptable).
‍ - The notion of sustainable investment can be measured at the level of a company and not only at the level of a specific activity. To the question of whether an investment in a company where 20% of the activity was related to renewable energy should be considered a 100% or only 20% sustainable investment, the European Commission does not decide and leaves it to the financial actors to choose one or the other aggregation method.
‍ - The Commission has clarified the concept of "taking into account" IAPs. Financial actors must disclose the policies and procedures they have in place to mitigate IAPs in addition to quantitative IAP reporting at the product level.
‍ - ETFs that were recently downgraded from Article 9 to Article 8 could be reclassified as Article 9 if they track Paris-aligned benchmarks (PABs) and climate transition indices (CTBs).
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3. The technical criteria of the last 4 objectives are finally published, the environmental taxonomy is about to be finalized?
The technical criteria related to the last 4 objectives of the Environmental Taxonomy, known under the acronym " taxo4 ", have been published by the European Commission. Stakeholders are invited to give their opinion on these proposals until May 3rd. These texts contain the technical criteria for assessing whether an activity is "sustainable" in the sense of the regulation.
The 4 objectives covered in this publication are:
- Sustainable use and protection of aquatic and marine resources;
- The transition to a circular economy;
- Pollution prevention and control;
- Protection and restoration of biodiversity and ecosystems.
With these new texts, all environmental objectives are now covered by the taxonomy, which represents an important step for stakeholders in complying with European regulations. These elements are very technical, they include thresholds, by industry, to determine whether an activity is sustainable. However, it should be noted that aviation has been included in the activities eligible for the taxonomy. Even if its alignment is conditional, in particular the use of sustainable aviation fuel (SAF ), this integration does not fail to react.
To discover the provisional timetable for the coming into force of the reporting obligations, click here.
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4. The proposals made by the SRI label committee, evolution or revolution?
On April 18, 2023, the SRI Label Committee published proposals to revise the SRI label standards to make them more demanding, more readable for investors and more effective in supporting advances in sustainable finance. A consultation is open on these proposals from April 18 to May 31, 2023 and the date of publication of the final standards should be September 30, 2023.
The proposals are based on 2 poles:
- New requirements, allowing in particular a better articulation with European regulations:
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- The integration of a common base of sectoral and normative exclusions with quantitative thresholds for exclusions such as: The exclusion of issuers whose revenues exceed 5% via coal or non-conventional fossil fuels;
- The minimum weighting of 20% of each E, S, G pillar in the overall rating;
- The 2 outperformance indicators chosen by the fund as part of the SRI label must be represented by the 2 SFDR IAPs most in line with the fund's ESG objective and must be covered by at least 90% of the companies in the portfolio;
- The reinforced commitment to companies in sectors with a high climate impact, as defined in the SFDR regulation, and the support of other companies in their transition process.
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‍ - Strengthened existing requirements:
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- Selectivity and rating improvement approaches increase the percentage reduction of the initial investment universe, it goes from 20% to 30%;
- The use of alert tools for the identification, monitoring and management of controversies becomes mandatory.
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If these proposals are accepted as they stand, financial actors holding SRI-labeled funds will have to quickly get up to speed to meet all the criteria or risk losing their certification.
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5. The market gives its vision of sustainable investment: AFG publishes "its" definition of Article 2§17
As we mentioned in a previous article, the lack of clarity in the regulatory definition of sustainable investment has led to different interpretations by the players. The AFG has recently published some common principles to ensure a certain convergence in the marketplace.
Two major methodological points should be retained from this publication.
- AFG proposes to consider a company as sustainable in its entirety, and therefore not to go down to a finer granularity, i.e. that of the activities.
- Sustainability can be "active" and/or "engaged". Contrary to other more strict doctrines, AFG proposes to consider a company as sustainable as soon as its commitment is measurable and enforceable.
The document then goes through the three parts of the SFDR definition of sustainable investment, proposing criteria to meet each part:
- The contribution to a sustainable investment objective. In order to translate the two facets of sustainability (i.e. active and committed), the AFG proposes to use, at the choice of the actor:
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- Quantitative accounting elements such as Turnover, CapEx and OpEx (including forecasts) in relation to the contribution to a sustainable investment objective
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- Non-accounting quantitative elements such as, the transition plans of the companies aligned with the Paris Agreement. or "Any other quantitative element allowing to assess the contribution of the company to an S objective as long as the indicators/the evaluation methodology are specified by the management company."
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- Do no Significant harm: The association takes up the requirement to use IAPs to demonstrate DNSH. It proposes using an alternative analysis (scoring type or controversy assessment) to address the current lack of data on this topic.
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- Good governance: It would be possible to use a very general indicator G to set a threshold. However, this indicator must integrate the pillars mentioned in the regulation.
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The AFG's text proposes to extend the definition of sustainable investment very widely, particularly to issuers that are only "committed". Very few constraints are to be noted in this text, which reflects the vision of a part of the market players.
It should be noted, however, that this vision runs counter to the current responses provided by the regulator (see above - text B). Indeed, the European Commission specifies in this text that an action plan cannot be sufficient to consider an issuer as a sustainable investment.
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6. The AMF takes a position on certain methodological elements of the SFDR
During the training day for RCCIs on March 25, the AMF clarified certain points of compliance that are still being debated by the players. Here are some important methodological elements:
- Definition of sustainable investment: what level of detail to use in the SFDR annexes?
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- Contribution to a sustainable investment objective: the SGPs must commit and publish the quantified minimum thresholds relating to their sustainable investment methodology.
- DNSH: The 14 indicators of table 1 of annex 1 of the SFDR RTS must be taken into consideration. Qualitative and quantitative proxies can be used when data is not available, however, these proxies must be systematic.
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- How to take derivatives into account in sustainable investment?
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- The authority maintains ESMA's position that long and short positions should be netted, to obtain a net position;
- Transparency is needed to analyze underlyings, counterparties are not to be taken into account;
- Assets whose performance is swapped via a TRS are excluded from the numerator.
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- How to take into account derivatives in the Taxonomy alignment percentage?
- Long exposures and assets whose performance is swapped by a TRS are excluded from the numerator.
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- How to take derivatives into account in the PAe indicators?
- The authority maintains ESMA's position, i.e. that Long/Short positions should be netted, with a limit of 0;
- It is necessary to make a transparency to take into account the underlying assets.
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- How to deal with the topic of fund of funds classification?
‍- Transparency of fund of funds is not mandatory. PMCs can consider, by default, an "Article 9" product as sustainable. Nevertheless, it is necessary to ensure a certain consistency between the sustainable objectives of the underlying funds and that of the fund of funds, without further clarification on the expected level of consistency.
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- Can estimated data be used for the Fund Taxonomy calculation?
- It is possible to use estimated data for the Taxonomy of Funds calculation if it complies with the "equivalent information" criteria of the ESA Q&A.
- For actors using estimated data, it is necessary to carry out the necessary due diligence and to ensure transparency on this subject in the SFDR annexes.
- Is cross-referencing allowed in templates ?
- In order to ensure conciseness, it is possible to refer to the body of the prospectus if it does not affect clarity.
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