Joint Response to ESAs Consultation on Sustainable Finance Disclosure Regulation RTS

On September 1, MFA and AIMA submitted comments in response to the European Supervisory Authorities (ESAs) consultation on draft regulatory technical standards (RTS) for the Sustainable Finance Disclosure Regulation (SFDR). The draft RTS set out the content, methodologies, and presentation of disclosures at the product and entity level under SFDR, and they will apply to financial market participants including MiFID investment firms, alternative investment fund managers (AIFMs), and UCITS managers. In response to this consultation, MFA and AIMA recommended that:

  1. Proportionality: disclosure requirements be applied taking into account proportionality considerations regarding the size, nature and complexity of activities of financial market participants;
  2. Timeline: the European Commission enact the request made by the ESAs to revisit the application deadline of the SFDR in light of the short timeline between the likely adoption of the RTS and the SFDR application date;
  3. Heterogeneity of Investment Strategies: the ESA’s provide further clarity on how short positions should be measured when calculating principle adverse impacts (PAI), as short selling can be a method for managing sustainability risk and supported the suggestion to include a separate section for information on how the use of derivatives meets environmental or social characteristics.
  4. Materiality of Adverse Impact Indicators: PAI indicators should only be taken into account where relevant and material to the activities of an investee company and, to reduce operational burdens and to ensure disclosures are user-friendly for investors, limit the level of details being requested regarding the methodologies used to asses each PAI, including through the use of links to the relevant information;
  5. Data: market participants be required to use “reasonable efforts” standard for gathering ESG data on portfolio companies, including through the use of third-party data providers;
  6. Differentiation Between Article 7 and 8 products: the ESAs clarify that the use of exclusionary screens to omit certain sectors alone typically does not signify that a financial product is promoting an environmental or social characteristic; and
  7. Reference to EU Concepts: the ESAs clarify that the use of prescribed expressions such as “no consideration of principal adverse impacts” or “no sustainable investment objectives”  should explicitly state that such expressions refer to the EU definitions of these concepts, as they could mean different impacts or objectives depending on the location of a fund’s investor.