by Nadia Humphreys, Business Manager, Sustainable Finance Solutions at Bloomberg, Co-rapporteur on the Platform for Sustainable Finance of the European Commission
On October 22nd, European regulators released important updates regarding ESG rules that aim to prevent greenwashing of investment products. The new draft Regulatory Technical Standards (RTS) merge obligations under the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) into one set of requirements, providing asset managers with clarity on product reporting. Here’s a quick and easy brief with all you need to know on the new rules and how to comply.
Are you in scope?
If you manage a fund that has environmental or social characteristics and are based in Europe, or market it into Europe or have a European end client, you are in scope for ESG reporting requirements in the EU.
The first step is then to determine if your product promotes environmental or social characteristics or pursues such objectives. If it ‘promotes’ then it would be classified under SFDR as an article 8 product, or ‘light green’. If it directly pursues either environmental or social objectives, then it would be classified as an article 9, or ‘dark green’ product.
When and what do you need to report?
Based on the newly released RTS, and previously announced reporting obligations impacting in scope firms regardless of fund characteristics, an asset manager providing an article 8 or 9 product needs to report:
- From January 2022, the Taxonomy-alignment of article 8 or 9 products for the first two environmental objectives (climate change mitigation and adaptation), with a go live date for the Regulatory Technical Standards in January 2023, subject to final approval on the date from the European Commission.
- From June 2023, SFDR reporting of principal adverse impacts (PAI) of its investment decisions
- From January 2023, the Taxonomy-alignment of these products against all six environmental objectives.
What type of data can you use to assess product alignment?
One of the challenges asset managers face is having to declare whether their product promotes environmental or social characteristics, or pursues such objective, without having the necessary data to assess the Taxonomy-alignment relative to their investments.
At the moment, it is challenging to match data disclosed by corporates to SFDR’s PAI, as many do not currently disclose meaningful data for this assessment. The same issue persists with taxonomy alignment, where corporates will not need to start reporting this themselves until January 2023.
However, the latest RTS states that “it is key that new product-level disclosures are realistic and adequately consider existing issues with providing meaningful Taxonomy-related disclosures.” To help asset managers, article 16a states that where information is not readily available from public disclosures by companies, they can use equivalent information and provide details of how this information was obtained, if it was directly from the companies or from third party providers.
When choosing the supplier of this information, it is important to understand the measures it takes to ensure data quality, how the data is processed and the portion of estimated data it uses.
Of note, Bloomberg has mapped available sustainability data directly to SFDR’s PAI indicators to provide asset managers with clarity and confidence in their SFDR reporting. Bloomberg is also providing the data needed to support an assessment of taxonomy eligibility and alignment, including a breakout of the environmental objectives: ‘Do No Significant Harm’ and ‘Minimum Social Safeguards’, which are needed to demonstrate and, more importantly, to understand compliance levels within a portfolio product.