The European Commission has once again delayed the implementation of the second phase of the Sustainable Finance Disclosure Regulation (SFDR) until January 2023.
The six-month postponement was announced in a letter to the Council of the European Union from the European Commission, dated 25 November, due to the “length and technical detail” of the directive.
John Berrigan, deputy director-general for financial stability, financial services and capital markets union at the European Commission, wrote the delay was necessary to “facilitate the smooth implementation” of the regulation by issuers, financial advisers and regulators.
Initially introduced on 10 March this year, SFDR’s function is to make disclosure of financial products’ performance on ESG issues compulsory for asset managers, as part of a wider push by the EU to leverage the power of capital markets to meet its emissions reduction targets.
SFDR ‘level two’ obligations require companies to report on 18 mandatory principle adverse impacts statements (PAIS) as well as other voluntary areas which go as far as the risks to a products’ valuation due to environmental impacts.
Part of the reason for the previous delay was due to the decision to bundle all 13 of the regulatory technical standards into a single delated act.
In his latest letter, Berrigan wrote: “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, we would defer the date of application of the delegated act to 1 January 2023.”
However, the delay follows new obligations for product disclosures implemented by the European Securities and Market Authority (ESMA) in October amid market concerns the current Article 8 and 9 categories could lead to an increase in greenwashing.
Under the new requirements, Article 9 products will be required to report on their environmental objective to highlight how they have impacted the environment.
Article 8 products with the new environmental objective will face pre-contractual and periodic product disclosures.
Cillian Brendan, partner at Dillon Eustace, commented: “This is likely to be welcome news for fund management companies in light of the delay in finalising 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.”
Eve Ellis, partner at Ropes & Gray, added: “While the delay provides additional time for managers to comply, uncertainty remains as to what these final rules will look like.
“This makes it challenging for managers in determining which SFDR product classification is relevant for their fund and whether they will be able to comply with the relevant disclosure requirements.”