ESAs allow some use of third-party data for taxonomy alignment but not estimates

Europe’s financial watchdogs – collectively known as the ESAs – have stated that while estimates must not be used by financial institutions under the EU’s Sustainable Finance Disclosure Regulation (SFDR), they may rely on information from “third party providers” where “information is not readily available from public disclosures”.

The EU’s regulatory trinity – which includes the European Insurance Occupational Pensions Authority (EIOPA), the European Securities Markets Authority (ESMA) and the European Banking Authority (EBA) – put out its updated supervisory statement on the application of the SFDR on March 25.

In the document, they stated that “while estimates should not be used, where information is not readily available from public disclosures by investee companies, financial market participants may rely on equivalent information on taxonomy alignment obtained directly from investee companies or from third party providers”.

But the practicality of ruling out estimates while allowing the inclusion of third-party data providers has been questioned by Victor van Hoorn, the head of Europe’s sustainable investment body, Eurosif. He told RI: “They say that you shouldn’t rely on estimates but in practice, we know as long as companies are not reporting these data points, you cannot avoid using some estimates, and therefore data providers.”

He explained that the biggest challenge for years has been that data from investee companies is not available, prompting asset managers turn to data providers, but these providers “are not going to have access to this magic trove of sustainability data reported by companies that has been hidden from everybody else”.

“What they’re going to do is use their own estimates and give you a number, and the challenge will be that, in similar fashion to each provider having its opinion on an issuer, they are likely to have different alignment numbers, making comparability challenging,” he added.

The ESA statement was put out to promote “effective and consistent application and national supervision of the SFDR, thus creating a level playing field and protecting investors”.

In it, they clarify that even though the technical criteria – known as Regulatory Technical Standards (RTS) – has not yet been approved for SFDR, financial market participants are still required to disclose their alignment with the EU’s ‘green’ taxonomy and fulfil the SFDR requirements that came into effect January 2022.

The planned RTS, which will cover how, and to what extent, economic activities in which financial products invest “qualify as environmentally sustainable under the Taxonomy Regulation”, was meant to be published in June, but the ESAs missed that deadline. This delay, coupled with the introduction of the requirement to report on taxonomy alignment in the new year, is a major source of frustration in the market.

Different expectations

The situation has resulted in different national regulators across Europe “coming up with different expectations, which sometimes contradicted each other or at least made life very difficult for firms operating in multiple different markets”, according to Van Hoorn, who told RI that the statement is an effort to deal with this issue.

“I think the ESAs are intervening to tell all the regulators to hold to the same supervisory expectations for firms and smoothen where possible the process of updating prospectuses to meet the new regulatory requirements… It’s supervisory convergence at work,” he said.

In their statement, the ESAs wrote that the “supervisory expectation during the interim period before the application of the RTS” is that “an explicit quantification should be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned”.

The ESAs also added that until the SFDR RTS is applied, taxonomy alignment could be “accompanied by a qualitative clarification”, explaining how the financial product reached its taxonomy alignment figure, including, potentially, “identifying the sources of information for that determination”.

In the interim, the draft SFDR RTS, which was submitted to the European Commission in February and October, can also be used as a reference for national regulators and market participants when considering taxonomy alignment, the ESAs wrote.