In November 2023, the European Securities and Markets Authority (“ESMA”) published three aides for stakeholders to support in navigating three areas of the European Union’s (“EU”) sustainable finance regulation: sustainable investments and environmentally sustainable activities; Do No Significant Harm (“DNSH”) regime; and Use of estimates.
The Sustainable Finance Disclosure Regulation (“SFDR”) and the Taxonomy Regulation are covered, alongside the Benchmarks Regulation (specifically the EU Climate Transition and Paris-aligned benchmarks) where relevant. The three documents are set out to be a “purely factual presentation” of the existing EU legislation, as well as the relevant guidance provided by the European Commission and the European Supervisory Authorities (the “ESAs”). They are not intended to add to, interpret, or replace any legal texts and have no legal effect. ESMA even sets out that the documents should not be construed as guidance.
Fitting with this status of the three documents there is no new information provided. However, they are useful reminders and consolidated sources of information on the three areas covered. For example, ESMA reminds financial market participants that should investee companies not meet the pre-condition of good governance then the financial product will be in breach of Article 8 or Article 9 of SFDR. As sustainable finance strategies are set, the focus is typically on the environmental or social characteristics to be promoted or the sustainable investment objective, alongside the sustainability indicators and other areas of SFDR-required disclosures.
Also, ESMA refers to previous guidance which set out that it is possible for financial market participants to create their own sustainable investment framework for their financial products providing that they do not interpret the areas of Article 2(17) differently across financial products offered.
It’s significant that ESMA reminds financial market participants that investments in Taxonomy-aligned environmentally sustainable economic activities can be automatically qualified as “sustainable investments” in the context of the product level disclosures under SFDR. This clarification addresses the issue of the double assessment of those investments under both the Taxonomy Regulation and SFDR, which could be useful for any financial products with a proportion of Taxonomy-aligned investments.
The SFDR and Taxonomy Regulation remain complex to navigate, and the ESMA aides may be useful reference points when reviewing those covered concepts under SFDR and/or the Taxonomy Regulation as they draw together the range of materials that cover those areas.
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