New Q&As added to ESAs’ Consolidated questions and answers on the SFDR and the SFDR Delegated Regulation

Background

On 25 July 2024, the ESAs published an updated version of the Consolidated questions and answers (the “Q&A”) on Regulation (EU) 2019/2088 (“SFDR”) and Commission Delegated Regulation (EU) 2022/1288 (the “SFDR Delegated Regulation”). The Q&A contains the ESAs’ responses to questions from market participants on the practical application of implementation of SFDR and the SFDR Delegated Regulation, as well as responses given by the European Commission to questions requiring interpretation of EU law.

 The new Q&As were added to the following sections:  

• Section I (Scope issues);
• Section IV (Principal Adverse Impacts or “PAI” disclosures); and 
• Section V (Financial product disclosures).

New Q&As – summary and key points

New Questions in Section I – Scope issues:

• Question 4 clarifies that Article 10 SFDR product level website disclosures must be hosted on accessible websites, which can be either product-specific or at group-level, provided that they correspond to the website of the manager. If no website exists, one must be established. The disclosures must be easily accessible to investors, kept up to date, and any changes clearly explained, in accordance with Recital 26 and Article 12 of the SFDR, and Article 2 of the SFDR Delegated Regulation.

• Question 5 provides that even if sustainability risks are deemed irrelevant for a specific product, managers must still adhere to other sustainability risk integration requirements from other legislation, including those set out in Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU (the “UCITS Delegated Directive”), as regards sustainability risks and sustainability factors for undertakings for collective investment in transferable securities and Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) No 231/2013 as regards sustainability risks and sustainability factors to be taken into account by alternative investment fund managers (AIFMs).

New Questions in Section IV – PAI Disclosures:

• Questions 26 – 29 provide technical guidance on calculating certain PAIs, covering aspects such as look-through requirements, applicable exchange rates, data aggregation, and Scope 1, 2, & 3 emissions. 

The ESAs clarify that, where financial market participants are aggregating the adverse impacts of their financial products or their financial products invested in other financial products (such as fund of funds), there should be a look-through approach to the investee companies causing GHG emissions (PAI indicator 1). This should be calculated from the underlying investee companies, irrespective of whether the investment in them is direct or indirect (indirect being, for example, investment through a UCITS).

New Questions in Section V – Financial Product Disclosures:

• Question 20 deals with the calculation and reporting rules for EU Taxonomy alignment at product level. The guidance confirms that turnover should be the default Key Performance Indicator (KPI) for disclosing the minimum extent of Taxonomy alignment in pre-contractual disclosures, with periodic reporting on actual levels of Taxonomy alignment encompassing all three KPIs: turnover, capital expenditures (CapEx), and operational expenditures (OpEx).

• Question 21 provides clarification on the measurement of a sustainable investment at both the economic activity and investment levels. It gives hypothetical financial product examples with illustrative, hypothetical objectives and investment strategies.

• Question 22 answers the question of whether a sustainable investment can also be made by investing in another financial product, e.g. a UCITS fund. It clarifies that a look-through approach must be applied to ensure compliance with the definition of a sustainable investment in Article 2(17) SFDR; If a financial product invests in other financial products that make sustainable investments with potentially differing applications of Article 2(17) SFDR, the financial market participant should ensure that the underlying investments of the other SFDR financial products comply with its own application of Article 2(17) SFDR.

• Question 23 relates to sustainable investments in a delegation context or for index-tracking products. The ESAs emphasise that delegating financial market participants must ensure that all investments classified as sustainable meet their criteria, even if invested in via delegation arrangements.

• Question 24 provides clarification in the context of the use of efficient portfolio management techniques and money market funds within Article 9 funds, outlining the conditions under which they may be considered part of the "investments for certain purposes such as hedging or liquidity."

• Question 25 reiterates that SFDR disclosures are fully applicable to financial products tracking Paris-Aligned Benchmarks (“PABs”) or Climate Transition Benchmarks (“CTBs”).

• Question 26 specifies, in the context of product website disclosures, that the obligation to publish the information referred to in Article 10(1)(c) – (d) (i.e. the pre-contractual and periodic disclosure annexes) should be fulfilled by publishing the templates in Annexes II-V of the SFDR Delegated Regulation. This means that the pre-contractual and periodic disclosure annexes must be published on the website. 

• Question 27 clarifies that real assets such as cars or real estate held in investee companies that are special purpose vehicles (“SPVs”) or holding companies do not require a good governance practice check; the ESAs state that only investee companies require this. While this answer appears to be contradictory, our interpretation is that SPVs or holding companies whose purpose is to hold real assets like cars or real estate do still appear to be considered investee companies, however, these types of investee companies do not require good governance checks. 

• Question 28 affirms that Article 9(3) SFDR^[1] is neutral regarding product design, meaning it applies to both financial products tracking PABs or CTBs, and to those with an active investment strategy.

The Q&A can be accessed here.

Do not hesitate to contact our ESG Legal Team should you have any questions on the above or require further guidance.