Ultimately, the SFDR should reduce the scope for greenwashing as disclosures will only contain relevant and targeted information as well as achieving greater consistency in disclosures between product manufacturers.
The SFDR is currently due to apply from 10 March 2021 but there is pressure from within the industry to delay the implementation of these requirements.
Benchmarks
This proposal is in relation to the EU Benchmarks Regulation. Advisers should be aware that the amendments introduce two new categories of investment benchmarks, each with different requirements:
- EU Climate Transition Benchmark (EU CTB)
- EU Paris Aligned Benchmark (EU PAB)
In addition, the new regulations outline certain disclosure requirements for all benchmarks (excluding interest rate and currency indices) including a disclosure on their alignment with the Paris Agreement goals by the end of 2021.
In terms of the implications for advisers, this amendment is likely to result in greater transparency, a further reduction to the threat of greenwashing and increased comparability between benchmark providers.
MiFID II
ESMA has proposed a number of amendments for integrating sustainability risk into three key regulatory directives: MiFID II, AIFMD and UCITS. The amendments to AIFMD and UCITS largely focus around improving transparency and disclosure requirements of both asset managers and asset owners but it’s the MiFID II amendments which carry the most significance for advisers.
ESMA is proposing that advice firms take into account sustainability considerations when complying with their existing organisational requirements (conflicts of interest policies, risk management functions, systems and controls etc) as well as considering sustainability factors in the context of product classification. This represents a nod to the PROD rules and the requirement for identifying target markets.
But perhaps the most significant proposal for advisers is the proposed amendment to Article 25 of MiFID II. This relates to the suitability assessment and firms will shortly be required to take into account their clients’ sustainability preferences within this assessment to determine whether an Article 8 investment or an Article 9 investment should be integrated into their investment strategy.
As referenced in the SFDR section above, Article 8 investments would capture solutions with different environmental and social ambitions that don’t qualify as Article 9 investments. An Article 9 investment must have a sustainable investment objective aligned to the EU taxonomy. This includes measurable environmental objectives in relation to renewable energy, greenhouse gas emissions or its impact on the biodiversity for example.
All of this is still in the negotiation stage and we are expecting the final rules and further clarity to be published in due course. The rules would then come into effect 12 months from publication so it’s reasonable to prepare for their implementation during Q4 2021.
