Level 2 SFDR

Moving forward in completing the European ESG regulatory framework, the Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing the Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector (the "Level 2 SFDR") (the Regulation (EU) 2019/2088 being the "SFDR") was published on the Official Journal of the European Union on Monday 25 July 2022.

Who will have to apply and comply with the Level 2 SFDR?

The Level 2 SFDR applies to financial market participants and financial advisers, such as UCITS Management Companies, AIFMs, Credit Institutions and Investment Firms (the financial market participants and financial advisers being, the "Participants" for the purpose of the relevant provisions of the Level 2 SFDR applicable to them, as the case may be).

What is the main impact of the Level 2 SFDR?

Prior to 1 January 2023, Participants are encouraged by the CSSF[1], to comply with the draft Level 2 SFDR on a best effort basis;
As from 1 January 2023, Participants are required to comply with the Level 2 SFDR by implementing templates, using methodologies and presenting information as provided for in the Level 2 SFDR.

The Level 2 SFDR requires Participants to disclose sustainability related information in pre-contractual documents (i.e., prospectuses for investment funds), on websites and in periodic reports (i.e., the annual reports for investment funds). The extent and the type of disclosure depends mainly on whether the financial product follows the regime of Article 8 or 9 of SFDR, while provisions related to PAIs-related disclosures also apply to the so-called article 6 products.

For the purpose of the above-mentioned disclosures, Participants shall use the templates annexed to the Level 2, namely:

Annex I: Template of statement on principal adverse sustainability impact;
Annex II and Annex III: Templates of pre-contractual information for financial products (including UCITS and AIFs) referred to in Articles 8 and 9 of SFDR;
Annex IV and Annex V: Templates of periodic information for financial products (including UCITS and AIFs) referred to in Articles 8 and 9 of SFDR.

What actions must be taken now?

Considering that the deadline to submit the updated prospectuses/issuing documents to the CSSF is 31 October 2022, it is advisable to finalise the implementation as soon as possible in order for the Participants to be able to file such precontractual documents in due course.

In this respect, the CSSF announced that it will give priority for visa-stamping to those prospectuses/issuing documents of UCITS and authorised AIF for which updates are limited to reflect only the sustainability related disclosure changes required by the Level 2 SFDR and the Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the "Taxonomy Regulation"), in relation to the four objectives referred to in article 9 (c) to (f). Provided that submissions made pursuant to the filing procedure which will be put in place in this context are complete, compliant and received by the CSSF by 31 October 2022, the CSSF will endeavour to release the visa stamp prior to 31 December 2022.

For the time being, it is unclear whether the CSSF will engage in a fast-track procedure (as it was the case for the implementation of the SFDR and the Taxonomy Regulation into the prospectus), but it seems that it would be the case for the filing of UCITS prospectuses that shall be accompanied by a RTS confirmation letter. The CSSF should give more details in this respect at a later stage.

What are the key dates to be kept in mind?

1 January 2023: date on which the Level 2 SFDR becomes applicable;
1 January 2023: date as from which periodic reports of funds subject to article 8 or 9 of SFDR must include Annex IV or Annex V;
30 June 2023: deadline to comply for the first time[2] with the website disclosure requirements related to principal adverse impact ("PAI") on sustainable matter in compliance with the Level 2 SFDR (i.e., covering the first reference period to be 1 January 2022 to 31 December 2023).