1489313 - Hogan Lovells FIS Horizons 2021 update - Flipbook - Page 28
Hogan Lovells
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Non-Financial Reporting Directive, EU
There is industry concern about the level and type
of ESG information that is currently available
to FMPs in light of the extensive disclosure
requirements imposed by the SFDR and the
Taxonomy Regulation, and the reliance that
FMPs will need to place on corporates in order to
comply with those requirements. Many financial
institutions have said that it will be challenging to
comply with these requirements if the information
that they need cannot be consistently obtained
from their investee companies and clients.
The Non-Financial Reporting Directive (NFRD)
has been predominantly held out as one of the
key ways for FMPs to obtain the data that they
will need to enable them to make the relevant
disclosures under the SFDR and the TR.
The NFRD requires companies that fall within its
scope to report on ESG information, both in terms
of how sustainability issues impact them and also
on how they impact such issues.
However, at present, the NFRD applies to EU
public interest corporates (which can include
organizations in the financial and non-financial
sectors) that have more than 500 employees and
are therefore considered as “large”. As a result,
there is a gap between those who are subject to
the NFRD and the data disclosed pursuant to the
NFRD, with the requirements of the SFDR and the
TR. As such, the European Commission launched
a consultation in February 2020 which proposes
to significantly expand the scope and content of
the NFRD in an attempt to reconcile the disclosure
requirements of the NFRD with the disclosure
requirements of the SFDR and TR. Amending the
NFRD in the proposed manner could result in
additional ESG information being made available
to FMPs by corporates, as more listed and unlisted
companies would fall within its scope.
However, some of the responses to the
consultation paper identified a timing discrepancy
between the application deadlines for the SFDR
and the TR, and the anticipated timing of the
first reporting cycle under any amended NFRD.
Currently, the Commission expects to adopt a
proposal regarding the NFRD in the first quarter
of 2021. Even with the proposed timing, it seems
likely that the data gap, the mismatch between the
SFDR and Taxonomy deadlines, and any revisions
to the NFRD are not going to be rectified any
time soon. This ultimately leads to a significant
outstanding question amongst FMPs on how
they are going to satisfy their own disclosure
obligations given their reliance on information
being made available from investee companies
and clients.
Brexit
SFDR
As it currently stands, the transition period under
the UK’s Withdrawal Agreement is due to end on 31
December 2020, with the SFDR coming into effect
after this date. The government is still considering
its wider approach to sustainable finance disclosures
and will set this out in due course.
In October 2020, the draft Securities Financing
Transactions, Securitization and Miscellaneous
Amendments (EU Exit) Regulations 2020
(Draft EU Exit Regs) provides that certain
articles of the SFDR which were inserted as a
result of the TR are “omitted”. Additionally, the
Financial Services Bill 2019 – 2021 (FS Bill)
which was published in October 2020, does not
contain any references to the SFDR.
On this basis, it seems unlikely that the SFDR will
become part of UK law following its departure
from the EU.
UK firms may nonetheless wish to include
certain SFDR-related disclosures on a voluntary
basis while they await details of the approach
that the UK will take to sustainable finance
disclosures. Such an approach would enable UK
firms to remain consistent with any EU group
companies and conversely with EU competitors,
which is particularly important given the
increasing investor pressure on firms to provide
sustainability-related disclosures. Otherwise,
UK firms will need to consider the practical and
reputational implications if they choose not to
adopt any of the disclosure requirements under
the SFDR.
