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October 6, 2022

Regulatory Briefing: ESAs propose additional disclosures for gas and nuclear under SFDR

The European supervisory authorities have advised the European Commission to add specific disclosures for economic activities in gas and nuclear energy considered to be taxonomy-aligned, to provide transparency to investors.

A “graphical representation” of the proportion of investments in fossil gas and nuclear energy is included as a requirement for financial market participants in the response to the draft Regulatory Technical Standards under the EU Sustainable Finance Disclosure Regulation. 

The amendments to the RTS were made collectively by the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority – the bodies tasked with harmonising prudential standards across the EU.

The ESAs published a joint report in which they say: “If the product does not intend to invest in such activities [gas and nuclear], such breakdowns are not required in the graphical representation.” They also recommend formulating a ‘yes or no’ question in the RTS to identify whether financial products under SDFR target economic activities in gas and nuclear.

RTS underpin both the SFDR and the taxonomy, which constitute the key pillars of the EU sustainable finance agenda. The SFDR requires investment firms to substantiate their sustainability claims using ESG indicators, while the taxonomy aims to provide clear and comparable standards across six environmental objectives.

How did we get there? In July, the European Parliament voted to allow, and subsequently confirmed, the addition of certain gas and nuclear activities to the bloc’s green taxonomy. These are specified in the Complementary Climate Delegated Act of February 2022, released by the commission.

Back in April, the commission gave the ESAs a mandate to amend the RTS “in relation to the information that should be provided in pre-contractual documents, on websites, and in periodic reports about the exposure of financial products to investments in fossil gas and nuclear energy activities”. It said that if they weren’t adjusted, “several areas in the SFDR might risk not to appropriately reflect the new factual and regulatory situation”.

What to expect next? The commission is now set to review the draft RTS and endorse them within three months of their publication, as the Complementary Delegated Act is scheduled to apply from January 1 2023. However, the ESAs also mention in their report that, due to the short timeframe for financial market participants to comply, they have left it to the commission to include the expected application date.

The ESAs’ report acknowledges that current geopolitical tensions linked to the war in Ukraine and high energy prices have forced the EU to rebalance its energy imports, while also having an impact on sustainability criteria.

In the report, feedback from an EIOPA stakeholder group says: “The exacerbation of terms and conditions spurred by the current geopolitical crisis shows how – in dire straits – fundamental evaluations of ESG criteria, which under normal conditions might have been considered as ‘the norm’, may force a change (fossil gas and nuclear energy as [ecologically] acceptable for an intermediate period under certain conditions, defensive arms systems as socially acceptable instead of generalised weapons avoidance, etc) in the assessment.”

A service from the Financial Times