Implementing the SFDR amended RTS in Germany and Luxemburg

The SFDR amended RTS (EU 2023/363) were published on 17^th February 2023. Following this, since 20^th February 2023, financial market participants have been expected to report the taxonomy-aligned activities in nuclear energy and natural gas using the templates in Annex I – IV of the amended RTS. The amended RTS impacts both the pre-contractual disclosure and the periodic disclosure.

This tight timeline resulted in increased tension to the already tough SFDR timelines for most market participants. Fortunately, some national regulators kindly granted a longer transition period for the industry to adapt. On 9^th March 2023, BAFIN granted a “transition period” for Art.8, Art.9 funds regarding the amended RTS format. The new deadline is now 1^st September 2023. Around one week after BAFIN introduced their extension, the CSSF also communicated their transition plan, which allows the existing Art.8 and Art.9 to continue using the pre-contractual documents set out prior to 17^th February 2023, unless further changes are introduced. The CSSF however, urged market participants to disclose the periodic reports using the new template in the amended RTS.

What changes are introduced in this regulation?

In pre-contractual disclosures, financial market participants need to disclose whether they intend to invest in nuclear energy or natural gas related economic activities. If yes, the planned minimum proportion of investments into the two types of activities should be included in the graphical representation. Similar to the pre-contractual disclosure, in the periodic disclosure, the actual proportion of investments in nuclear energy or natural gas related economic activities should be calculated and included in the graphical bar chart.

What do participants need to do?

Financial market participants must screen and review their investment strategies to provide the required information in the pre-contractual disclosure. However, the periodic disclosure is more challenging. In this case, financial market participants must collect the actual proportion of investments in nuclear energy or natural gas related economic activities. This means nuclear energy and natural gas related activities must be reported and collected separately. Most institutions already struggle to retrieve such information from the industry, not to mention the verification steps to ensure the data quality.

From our observations, the industry is not ready to disclose such granular information. The ambiguity and lack of information leads to low precision in the quantitative disclosure. The percentage alignment between both nuclear energy and natural gas related economic activities is close to 0% for almost all of the cases. Nevertheless, market participants could try to screen the available information from multiple providers and adopt appropriate assumptions to disclose reasonable quantitative figures to the investors.

We see potential to improve the data quality in the second half of this year. From 2024 onwards, the first companies will begin to disclose their sustainability reports under the corporate sustainability reporting Directive (CSRD).