Final Report on draft Regulatory Technical Standards

1 Final Report on draft Regulatory Technical Standards with regard to the content, methodologies and presentation of disclosures pursuant to article 2a(3), article 4(6) and (7), article 8(3), article 9(5), article 10(2) and article 11(4) of Regulation (EU) 2019/2088 JC 2021 03 2 February 2021 2 Contents 1. Executive Summary 3 2. Background and Rationale 5 3. draft RTS 11 4. Accompanying documents 99 Impact Assessme nt 99 Feedback on Public Consultation 123 3 1. Executive Summary The European Supervisory Authorities (ESAs) have developed through the Joint Committee (JC) draft Regulatory Technical Standards (RTS) with regard to the content, methodologies and presentation of sustainability-related disclosures under empowerments Articles 2a, 4(6) and (7), 8(3), 9(5), 10(2) and 11(4) of Regulation (EU) 2019/2088 (hereinafter Sustainable Finance Disclosure Regulation SFDR ).

2 The draft RTS text and accompanying Annexes set out proposal in these areas. They reflect the responses to a Consultation Paper (JC 2020 16) published on 23 April 2020. The draft RTS also contain templates for pre-contractual and periodic product disclosures that were subject to an online public survey and to two consumer testing exercises conducted in the Netherlands and Poland. In line with the empowerment in article 4(6) SFDR, the ESAs also sought input from the Joint Research Centre of the European Commission and the European Environment Agency as referred to in article 4(6) SFDR. The draft RTS relate to several disclosure obligations under the SFDR regarding the publication of: The details of the presentation and content of the information in relation to the principle of do not significantly harm as set out in article 2(17) of the SFDR consistent with the content, methodologies, and presentation of indicators in relation to adverse impacts referred to in article 4(6) and (7) SFDR ( article 2a SFDR).

3 A statement on an entity s website of describing its due diligence policy in respect of the adverse impact of investment decisions on sustainability factors in relation to climate and other environment-related impacts ( article 4(6) SFDR) and adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters ( article 4(7) SFDR). Pre-contractual information on how a product with environmental or social characteristics meet those characteristics and if an index has been designated as a reference benchmark, whether and how that index is consistent with those characteristics ( article 8 SFDR). Pre-contractual information to show, where a product has sustainable investment objectives and a) has a designated index as a reference benchmark, how that index is aligned with the sustainable investment objective and an explanation as to why and how that designated index aligned with the objective differs from a broad market index ( article 9(1) SFDR); or b) if no index has been designated as a reference benchmark, an explanation on how those objectives are to be attained ( article 9(2) SFDR).

4 Information on an entity s website to describe the environmental or social characteristics of financial products or the sustainable investment and the methodologies used ( article 10 SFDR). 4 Information in periodic reports according to sectoral legislation specifying (a) the extent to which products with environmental and/or social characteristics meet those characteristics, and (b) for products with sustainable investment objectives and products which objective is a reduction in carbon emissions: (i) the overall sustainability-related impact of the product by means of relevant sustainability indicators and (ii) where an index has been designated as a reference benchmark, a comparison between the overall impact of the financial product with the designated index and a broad market index through sustainability indicators ( article 11 SFDR).

5 The draft RTS text and accompanying Annexes form the core of this Consultation Paper (Section 3). An impact assessment and feedback statement on the consultation paper are also included in (Section 4) to highlight possible costs and benefits of the proposals and to summarise the responses received and reaction from ESAs. Responses by the stakeholder group of ESMA and EIOPA are attached as annexes. 5 2. Background and Rationale Following the adoption of the 2015 Paris Agreement on climate change and the United Nations 2030 Agenda for Sustainable Development, the Commission has expressed in the Action Plan Financing Sustainable Growth its intention to clarify fiduciary duties and increase transparency in the field of sustainability risks and sustainable investment opportunities with the aim to: reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth; assess and manage relevant financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and foster transparency and long-termism in financial and economic activity.

6 Given the environmental emergency situation, urgent action is needed to mobilise capital not only through public policies but also by means of the financial services sector. In order to adapt to this new environment, financial market participants and financial advisers should be required to disclose specific information on their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts. SFDR sets out sustainability disclosure requirements for a broad range of financial market participants, financial advisers and financial products. It was enacted to address the twin objectives of increasing transparency of sustainability-related disclosures and to increase comparability of disclosures for end investors. The legislation and the ESAs RTS aim to reduce information asymmetries in principal-agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts and the promotion of environmental or social characteristics as well as sustainable investment by means of pre-contractual and ongoing disclosures to end-investors, acting as principals, by financial market participants or financial advisers, acting as agents on behalf of principals.

7 The empowerments to the ESAs to deliver RTS in SFDR can be divided into two parts: Adverse impact reporting at entity level: disclosures of principal adverse impacts of investment decisions on sustainability factors including detailed indicators for environmental and social impacts; and Pre-contractual, website and periodic product disclosures: applicable to products with either environmental or social characteristics ( light green ) or with sustainable investment objectives ( dark green ), including provisions on do not significantly harm (DNSH). 6 The ESAs launched a consultation paper on 23 April 2020 with draft RTS that the ESAs sought feedback on from stakeholders. The ESAs received 165 responses with over 3000 pages of written material. The responses and the reaction from the ESAs are included in Section below.

8 The ESAs also held a public hearing on 2 July 2020 which had over 1225 views and where the ESAs received a further 800 comments and questions. In order to improve transparency and comparability of product disclosures, the ESAs also resolved to create harmonised templates for pre-contractual and periodic product disclosures. Due to the uncertainty regarding the content of pre-contractual disclosures when the consultation paper was launched, templates were developed under a separate process by the ESAs during summer 2020. From 21 September to 16 October 2020 the ESAs ran a survey seeking public feedback on draft pre-contractual and periodic product templates. It sought stakeholder feedback on the presentational elements of the templates. Separately, the templates were consumer tested by the AFM in the Netherlands in September and a second consumer testing exercise was conducted in Poland in cooperation with the Warsaw School of Economics in November 2020.

9 The results of the consumer testing are published separately as accompanying documents to this Report . EIOPA s Insurance and Reinsurance Stakeholder Group and Occupational Pensions Stakeholder Group issued a joint response on 7 July. ESMA s Securities and Markets Stakeholder Group (SMSG) response was received on 15 September by the ESAs. The ESAs have updated the draft RTS for this Final Report in light of the feedback received from stakeholders. Entity level principal adverse impact reporting The draft RTS for entity level principal adverse impact reporting provide a specification for the content, methodology and presentation of the information required by article 4(1)-(5) SFDR in respect of the sustainability indicators in relation to (1) adverse impacts on the climate and other environment-related adverse impacts and (2) adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

10 The draft RTS includes a mandatory reporting template, set out in Annex I, to use for the statement on considering principal adverse impacts of investment decisions on sustainability factors. The disclosures are focused on a set of indicators for both climate and environment-related adverse impacts and adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. These indicators are divided into a a core set of universal mandatory indicators that will always lead to principal adverse impacts of investment decisions on sustainability factors, irrespective of the result of the assessment by the financial market participant, and additional opt-in indicators for environmental and social factors, to be used to identify, assess and prioritise additional principal adverse impacts.