The European Union has postponed the implementation of SFDR 'level 2' until January 2023.
A Brief Summary
The European Commission has delayed the implementation of the Sustainable Finance Disclosure Regulation until January 2023. The delay is due to the "length and technical detail" of the directive. SFDR's function is to make disclosure of financial products' performance on ESG issues compulsory for asset managers.
The European Securities and Markets Authority (ESMA) has delayed finalizing the SFDR Level 2 measures. The delay provides additional time for managers to comply with the new rules. But uncertainty remains as to what the final rules will look like, according to reports.
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The second phase of the Sustainable Finance Disclosure Regulation (SFDR) has been postponed by the European Commission until January 2023.
The European Commission announced the six-month delay in a letter to the Council of the European Union dated November 25, citing the directive's "length and technical detail."
The delay was required to "enable the smooth implementation" of the legislation by issuers, financial advisers, and regulators, according to John Berrigan, deputy director-general for financial stability, financial services, and capital markets union at the European Commission.
The purpose of the SFDR, which was first implemented on March 10 this year, is to make asset managers' disclosure of financial products' performance on ESG concerns mandatory, as part of the EU's larger attempt to harness the power of capital markets to accomplish its emissions reduction targets.
Companies must report on 18 mandatory principle adverse impacts statements (PAIS) as well as several voluntary areas that go as far as the risks to a product's valuation due to environmental problems under SFDR's 'level two' duties.
The decision to combine all 13 regulatory technical standards into a single delated act was part of the cause for the earlier delay.
"We would defer the date of application of the delegated act to 1 January 2023," Berrigan wrote in his latest letter, "due to the length and technical detail of those 13 regulatory technical standards, the time of the submissions to the Commission, and to facilitate the smooth implementation of the delegated act by product manufacturers, financial advisers, and supervisors."
However, the postponement comes after the European Securities and Markets Authority (ESMA) introduced new product disclosure requirements in October, citing market worries that the current Article 8 and 9 categories could lead to an increase in greenwashing.
Article 9 products will be expected to report on their environmental aim in order to show how they have impacted the environment under the new criteria.
Pre-contractual and periodic product disclosures will be required for Article 8 items with the new environmental goal.
"This is likely to be welcome news for fund management companies in light of the delay in finalizing the SFDR Level 2 measures and the significant data challenges currently being encountered in gathering the necessary data to adhere to the very prescriptive and detailed disclosures," Cillian Brendan, partner at Dillon Eustace, said.
"While the postponement allows further time for managers to comply, ambiguity remains as to what these final guidelines will look like," Eve Ellis, a partner at Ropes & Gray, added.
"This makes establishing which SFDR product classification is suitable for their fund and whether they will be able to comply with the relevant disclosure requirements difficult for managers."
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