On 13 May 2022, the European Supervisory Authorities (ESAs) submitted to the European Commission 10 queries regarding the interpretation of the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation (TR).

The queries relate to the following five areas:

  • Principal adverse impact (PAI) disclosures: Whether it is possible for a financial market participant to not consider PAI at entity level but, instead, consider PAI under Article 7 SFDR for some of the financial products it manages. If so, can they disclose this under Article 4(1)(b) SFDR?
  • Financial services: Will financial advisors have to comply with disclosure obligations in Article 6(2) SFDR for the provision of investment advice as “a whole”, as well as any financial instrument as defined by MiFID II. Should financial advisors need to consider account information from non-financial companies for the purpose of the disclosure of principal adverse impacts under Article 4(5)(a) SFDR when recommending certain financial products or instruments? Do financial advisors who are only considering products which are not in scope of the SFDR still need to comply with the obligations in Articles 3,4,5,6, and 13 SFDR. Finally, how will self-employed managers or part time employees be counted under Article 17 SFDR given a lack of definition for ‘Employ’ or ‘employee’.
  • Transparency of the integration of sustainability risks and rules for products no longer made available: Do Articles 6 and 7 SFDR only apply to new financial products, or do they also apply to existing products and products no longer made available to investors? Further clarification was also requested regarding whether financial products which are no longer available to new investors need to update and deliver pre contractual disclosures, and provide website and periodic disclosures to existing investors.
  • Good governance practices: Is a product able to continue disclosing under Article 8, 9 and 11 SFDR even if that product disclosing under Article 8 or 9 SFDR does not invest in companies with good governance? Furthermore, can a financial product investing solely in government bonds while applying an ESG investment strategy be considered to fall under either Article 8 or 9 SFDR?
  • Scope of Articles 5 – 6 TR: If a financial product which promotes environment characteristics does not commit in the pre contractual disclosures to invest in any economic activities that contribute to an environmental objective specified in Article 2(17) SFDR, do they need to disclose the information required by Article 6 TR? If so, in a case where it is later determined that the same financial product invested in such economic activities would they be obliged to make a disclosure? Likewise, would a financial market participant be obliged to disclose the information required by Article 5 TR in a case where, initially, the financial product only committed in the pre-contractual disclosures to invest in economic activities contributing to social objectives but, is later found to have in fact invested in economic activities contributing to an environmental objective?