Private Investment Funds and ESG: European Commission Delays Finalization of the SFDR’s Regulatory Technical Standards

This client alert, part of a series focused on ESG regulatory developments, provides an overview of the upcoming EU regulatory changes. It should be read together with our ESG Lexicon, available here, which provides definitions of any terms not defined herein.

Key Takeaways

• The European Commission has announced that it is delaying the applicability date of certain requirements of Regulation 2019/2088 on sustainability-related disclosures for the financial services sector (the “SFDR”).
• The SFDR contains principles-based requirements (“Level 1 requirements”) that will be supplemented by regulatory technical standards (“RTSs”), which will set out the “Level 2 requirements.” The first draft RTSs were released in April 2020 and were set to be finalized by the end of 2020. The European Commission has said that high level and principles-based requirements will still apply as of March 10, 2021, as planned, but the Level 2 requirements will be delayed until a later date, possibly January 2022 or later.
• U.S. fund managers that market funds in the European Union or establish an EU fund still need to prepare to comply with Level 1 requirements as early as March 2021 and will need to monitor developments related to the forthcoming RTSs in order to comply with subsequent Level 2 requirements.

Overview

As discussed further in our prior alert (available here), the SFDR (available here) will require alternative investment fund managers (“AIFMs”), including U.S. fund managers that market funds in the European Union or establish an EU fund, and alternative investment funds (“AIFs”) to make new disclosures related to (i) how sustainability is addressed in the investment decision-making process and (ii) “financial products” characterized as sustainable investments or that promote environmental and/or social characteristics. The text of the SFDR lays out the principles-based, Level 1 requirements that will apply as of March 10, 2021 and calls for Level 2 requirements to be finalized through RTSs by the end of 2020. The European Supervisory Authorities (“ESAs”) published draft RTSs earlier this year, consistent with this timeline. However, in a recent letter sent to two trade associations in Italy and Germany, the European Commission indicated that finalization of the RTSs and the deadline for compliance with the corresponding Level 2 requirements will be delayed. This letter (which is unofficial) indicates that Level 2 requirements are now not expected to become effective until January 2022 or later. It should be stressed that the delay in finalizing and implementing Level 2 requirements does not affect the SFDR’s Level 1 requirements, many of which take effect as of March 10, 2021.

Delays in the Applicability of the Regulatory Technical Standards Disclosure Requirements

In April 2020, the ESAs set out draft RTSs (available here) in respect of the content, methodologies and presentation of the information required in relation to “principal adverse sustainability impacts” and in respect of AIFs that promote environmental and/or social characteristics or that have sustainable investment as their objective. The final RTSs will supplement the SFDR and were originally due by the end of 2020. In its letter to the two trade associations, the European Commission stated, “[i]n order to provide financial market participants and financial advisers as well as supervisors with time for implementation, the Regulatory Technical Standards will become applicable at a later stage.” The final RTSs will now be released at a later date, and the related Level 2 requirements are not likely to apply until at least January 2022. Annex A indicates which articles of the SFDR include references to supplementary RTSs, and therefore relate to pending Level 2 requirements with delayed effective dates.

Principles-based Disclosure Requirements Remain Applicable as of March 10, 2021

High-level, principles-based disclosure requirements (the Level 1 requirements) are delineated within the text of the SFDR itself and do not require RTSs to supplement them. These requirements will continue to apply as of their original effective dates, most of which are March 10, 2021. Provisions of the SFDR relating the integration of sustainability risks in the investment decision-making process (Articles 3, 5 and 6), for example, will continue to apply as of March 10, 2021.

Looking Ahead

U.S. fund managers that market funds in the European Union or establish an EU fund not only need to prepare for the SFDR’s principles-based Level 1 requirements that become effective as early as March 10, 2021, they also need to monitor developments related to the finalization of the RTSs in order to prepare for forthcoming Level 2 requirements. While the newly announced delay provides some short-term relief from compliance, AIFM- and AIF-level disclosures will likely need to updated once again in 2022, which puts further pressure on legal and compliance teams.

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