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The SMSG refers to its earlier advice on ESG Disclosures (ESMA 22-106-2858). “The SMSG believes that the synergy between different pieces of legislation (in particular the Non-Financial Reporting Directive (NFRD), the Taxonomy Regulation, and the Sustainable Finance Disclosure Regulation (SFDR), but also adjacent legislation such as the Shareholders Rights Directive II and the scheduled reviews of MiFID and UCITS/AIFMD) can contribute significantly to enhancing sustainability in the economy. However, neither the timings nor the concepts of these different pieces of legislation are fully aligned with one another.”
By introducing the Taxonomy Regulation’s Environmentally Sustainable Activities into the Sustainable Fi-nance Disclosure Regulation, another piece of the puzzle is completed. Although the SMSG welcomes this, it remains worried by the complexity that results from the piecemeal introduction of different pieces of legis-lation and the use of concepts that are close to one another although not identical to one another. While the SMSG is aware that the draft RTS are confined by the Level 1 legislation, it has added some suggestions for simplification.
With regard to the different questions, the SMSG supports the ESA’s proposal to amend the existing draft RTS, rather than draft a new set of RTS.
The SMSG believes that derivatives can serve many purposes, including ESG purposes. In such contexts, the KPI can be extended to include derivatives, provided that it is adequately disclosed how they serve ESG purposes.
On the issue of the KPI indicator, the SMSG is worried that the KPI tells only part of the story. Some instruments cannot be included (example sovereign bonds); social objectives are not yet included. Also, it is concerned that in the perception of the investor, the KPI gets undue prominence (“one indicator tells it all”). For this reason, the SMSG supports an approach where the denominator excludes instruments that are not in scope of the Taxonomy Regulation. However, this should be complemented by another indicator which indicates the potential coverage of the Taxonomy Regulation.
The SMSG believes that assessment by a third party would be useful. However, due to data problems and methodological challenges, it is reasonable to assume that in the beginning, financial companies will be on a learning curve. As such, such assessment should be of an advisory, rather than a compliance nature at first. The SMSG also believes that the responsibility of the data on the investee companies rests with the investee companies themselves. This is something that should be provided for in the Corporate Sustaina-bility Reporting Directive.
It is likely that not only companies, but also National Competent Authorities will be on a learning curve. For this reason, the SMSG proposes that the implementation of this legislation should be a prime focus of reg-ulatory convergence. Also it suggests that questions by financial institutions are primarily answered through ESMA Q&A, rather than bilaterally with national competent authorities.
As already described above, the SMSG remains worried about the complexity of the proposals, to a large extent resulting from piecemeal implementation of different sets of level 1 legislation. To reduce, within the confines of level 1 legislation, the SMSG suggests (i) some subtle wording changes; (ii) to avoid duplication in questions; (iii) clarifications with regard to the indicators.
The SMSG supports the preferred options proposed by the ESAs in their impact analysis be it with some side remarks.
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