When the European Commission launched the Action Plan for Sustainable Finance in March 2018, it was an attempt to adjust the entire EU legal framework of financial and insurance sectors to a uniformed approach, ensuring equal protection in the broader financial services spectrum in terms of mitigating green washing, and reorienting capital flows towards sustainable investments. In other words, it was an attempt to align financial products that are usually subject to different regulations (Mifid, UCITS directive, IDD, etc.) under a single legal framework, defining what sustainability should look like for financial services. To do so, a set of rules and regulations has been put together.
In addition to defining an EU Taxonomy, the purpose of which is to build a classification tool to help investors and companies make standardised and informed investment decisions on ESG friendly activities, the first step of the European Action Plan for Sustainable Finance was the EU Regulation 2019/2088 on sustainability‐related disclosures in the financial services sector (i.e. SFDR). This Regulation set up the rules for integration of sustainability risks both at entity and product levels, as well as the adverse impact of investment decisions. Additionally, the EU legislator has also drawn up a list of "financial products" which lays down the limits of the regulation scope. This list stretches from the portfolio management service, passing through UCITS and AIFs up to pension schemes and IBIPs. This global approach of the SFDR, while sending a firm message to all operators in the financial and insurance sectors about the need to adapt to new sustainability parameters, soon showed the challenges of a uniform adaptation.
Step two of the process was to entrust to the European Supervisory Authorities (so-called ESAs, i.e. EBA-ESMA-EIOPA) the drafting of the Regulatory Technical Standards (“RTS”) to regulate the more technical aspects of the SFDR and translate them into a clear framework of mandatory standardised disclosure requirements. In other words, drafting a clear user guide for implementation. The Authorities also undertook the difficult task of getting into the perspective of the individual market sectors (investments, pensions, insurance-based solutions) in such a way as to consider the different specificities without losing the essence and founding values of the SFDR.
The technical complexity of the issue is highlighted by the fact that the draft RTS, which were supposed to be adopted by the European Parliament as a delegated regulation to enter into force in January 2022, were first postponed to July 2022 and then again to January 2023. This leaves financial market participants in a grey zone as to how to apply the SFDR regulation in a harmonised way. In particular, it leaves them with an open question: how to correctly implement the additional SFDR delegated acts that oblige the collection and consideration of client's preferences in terms of sustainability in the suitability assessment forms, if the date of entry into force does not coincide with the RTS one? Indeed, as of 2 August 2022, insurance distributors are supposed to comply with Delegated Regulation 2021/1257 while the RTS will enter into force only on January 2023.
If the draft RTS is currently the only guideline that market operators such as insurance companies have to design an ESG financial product compliant with EU provisions, there are several factors of interpretative uncertainty to consider.
Sustainable Finance Disclosure Regulation