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Green funds that fail to collect taxonomy data must report zero alignment, says EC

This is the second set of guidance published by the EU legislative body on the SFDR.

Managers of funds that integrate environmental considerations must report their proportion of taxonomy-aligned investments as zero if they have “failed” to collect the required data, according to a new Q&A published by the European Commission.

These funds can either fall under the EU’s Article 9 fund category, referring to funds that have a primary social or/and environmental goal, or the less ambitious Article 8 designation, for funds that combine traditional and sustainability-related investment objectives.

The Commission stressed that managers cannot justify a lack of alignment by “a lack of data”. In exceptional cases where reporting entities cannot obtain reliable and high-quality taxonomy information, they are “allowed to make complementary assessments and estimates on the basis of information from other sources”.

The latest interpretation of the bloc’s fund sustainability disclosure rules – known as the Sustainable Finance Disclosure Regulation – demonstrates the delicate balancing act facing the Commission as it seeks to prevent a widespread lack of data from derailing the incoming SFDR regime, while ensuring that disclosures remain useful for investor decision-making.

In line with this, the Commission warned that disclosing information that is not backed by reliable data could risk infringing taxonomy disclosure legislation or “sector specific rules, incurring liability, or voidance of contracts under national law”.

Critics have argued that longstanding data shortages have been exacerbated by the Commission’s sequencing of reporting requirements. Asset managers will have to report on taxonomy alignment and the broader ESG credentials of their products from January 2023, despite many companies being under no obligation to report on these metrics until at least 2024, when the EU’s corporate reporting requirements are expected to come into force.

The exceptions to this are large EU companies, which will start reporting their taxonomy alignment alongside financial organisations in 2023 – however, disclosure KPIs do not include negative corporate impacts on sustainability factors or other metrics such as emissions and social indicators, which are required by the SFDR.

The Commission Q&A also clarified that asset managers can elect to not consider negative corporate impacts, known as Principal Adverse Impacts, at entity level, while still integrating them at individual product level.

This is the second Q&A on the SFDR issued by the Commission, following a Q&A published last year, which industry sources said did little to address market confusion over the rules. Both opinions were published at the request of the EU’s regulatory trinity – the European Insurance Occupational Pensions Authority (EIOPA), the European Securities Markets Authority (ESMA) and the European Banking Authority (EBA), known collectively as the ESAs.

EU ESG trade body Eurosif welcomed the latest installment, describing it as providing “much needed clarity” around product-level disclosures. “Eurosif welcomes the Commission’s pragmatic interpretation of product-level disclosure requirements under SFDR, particularly in view of the limited availability of reliable data on the taxonomy-alignment at product-level,” it said in a statement.

“An updated joint ESAs supervisory statement accounting for this Q&A would assist national supervisors in applying taxonomy-related product disclosures in line with the Commission’s latest interpretation.”