Less than one month to go until the European Union’s Sustainable Financial Disclosure Regulation comes into force. The Level 2 SFDR shall be already taken into account.

As part of the European Commission’s action plan on sustainable finance, first announced in 2018, the new European regime on sustainability-related disclosures in the financial sector will come into force on 10 March 2021. From that day onwards, the vast majority of the regulation will apply.

The rules apply to financial services participants, such as investment firms and fund managers, including non-EU fund managers marketing funds into the European Union, but also insurance companies offering IBIPs (insurance-based investment products).

Regardless of whether an ESG focus or strategy is applied, disclosure information comprises how sustainability risks are incorporated in the decision making process and the disclosure of the principal adverse impact (PAI) of investments but also information on the consideration of sustainability criteria in a firm’s remuneration policy. Increased disclosures obligations apply at product-level in particular in relation to such products which promote an ESG focus as an explicit objective or otherwise include the promotion of environmental or social characteristics.

Disclosure obligations will have to be complied with and included in the firms’ pre-contractual disclosures, i.e. where applicable, generally into a prospectus (e.g. for a UCITS fund and based on the Alternative Investment Fund Directive), but also for the funds’ annual reports. In addition the SFDR describes certain information that must be published on the financial services participants’ website.

While the SFDR does not contain details on what must be disclosed it mandates the European supervisory authorities (ESMA, EBA at al) to develop regulatory technical standards (RTS). The latest draft of the RTS, also known as the “Level 2 SFDR”, was published on 11 February 2021 and provides, among others, in relation to the disclosure on firm-level a detailed list of PAIs of investments and in relation to disclosure on product-level that pre-contractual and periodic documentation shall contain descriptions of the characteristics and objectives of financial products in form of mandatory templates.

Although the Level 2 SFDR is not proposed to come into effect until 1 January 2022, the general level of prescription of disclosure requires already now an implementation of the governance set out in the Level 2 SFDR to meet future market standards.