Regulatory Update: December 2022

Learn about the most important compliance and regulatory news developments courtesy of FactSet's Regulatory team.

Sustainable Finance - EU

• The European Commission has updated the technical standards under the Sustainable Finance Disclosures Regulation (SFDR). The amendments will require financial market participants to also disclose, by way of a simple graph, the extent to which their portfolios are exposed to the gas and nuclear-related activities that comply with the Taxonomy. View the updated Delegated Regulation.

• ESMA changed its union strategic supervisory priorities to include ESG disclosures alongside market data quality. This will help to improve transparency and comprehensibility of ESG disclosures across key segments of the sustainable finance value chain such as issuers, investment managers or investment firms, and therefore tackle greenwashing.

• The European Banking Authority (EBA) reasserts its commitment to contribute to a more resilient and sustainable financial system at the COP27 by publishing its environmental statement. EBA also presented its priorities and activities to ensure a robust management of ESG risks and adequate related supervision. 

• The three European Supervisory Authorities (ESAs)—EBA, the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA)—launched a Call for Evidence to gather input from stakeholders on greenwashing and how to understand its key metrics, drivers, and risks to collect examples of potential greenwashing practices. Responses are expected by January 10, 2023, and final reports should be due in May 2024.

• The Corporate Sustainability Reporting Directive (CSRD) has been adopted by the EU parliament and received final approval from the council. It will now be published in the Official Journal of the European Union (OJEU) and enter into force after 20 days. Member states will have 18 months to implement the CSRD.

• The European Financial Reporting Advisory Group (EFRAG) submitted its first set of draft European Sustainability Reporting Standards to the European Commission in its role as technical adviser, under the proposed CSRD. The European Commission will now consult EU bodies and Member States on the draft standards before adopting the final standards as delegated acts in June 2023. Here is EFRAG's advice package.

• ESMA is seeking stakeholders' feedback on guidelines for the use of ESG and sustainability-related terms in funds’ names in order to tackle greenwashing. ESMA is considering the introduction of quantitative thresholds for funds that make use of ESG-related terms or feature sustainable in their name. Consultation is open until February 20, 2023.

• The ESAs sent a letter to the EC and requested to extend their mandate to review the Principal Adverse Impact indicators (PAIs) framework under SFDR, highlighting the complexity of the work involved in revising this PAI framework and the need for a public consultation. They communicated the initial deadline to provide input by April 2023 is no longer realistic and thus request a six-month extension.

• The ESAs published a Q&A on the practical application of the SFDR Delegated Regulation. ESAs will be adding more Q&As to this set in the future and are preparing a consultation paper under the mandate from the Commission to review certain aspects of the Delegated Regulation.

Sustainable Finance - World

• The Taskforce on Nature-related Financial Disclosures (TNFD) published version 0.3 of its beta framework for risk management and financial disclosure incorporate a number of important modifications and additions providing among others some adaptability and flexibility regarding the double materiality approach.

• The International Sustainability Standards Board (ISSB) will require companies to use climate-related scenario analysis to report on climate resilience and to identify climate-related risks and opportunities to support their disclosures under the International Financial Reporting Standards’ (IFRS) Climate Disclosure standard. 

Sustainable Finance - UK

• The UK Transition Plan Taskforce (TPT) launched in April 2022 has published its draft transition plan framework aiming to develop the gold standard for private sector climate transition plans.  It includes:
  • The TPT Disclosure Framework: recommendations for companies and financial institutions to develop gold-standard transition plans
  • The TPT Implementation Guidance sets out the steps to develop a transition plan and the related modalities
  • The technical annex for companies and financial institutions to test implementation
  • The Disclosure Framework and Implementation Guidance are open for public consultation until February 28, 2023.

• The UK Financial Conduct Authority (FCA) has finally published its consultation paper CP22/20 on the sustainability disclosure requirements (SDR) regime and investment labels. The consultation is open until January 25, 2023, and the FCA intends to publish final rules by the end of the first half of 2023. In the consultation paper, the FCA proposes to introduce among others:
  • Sustainable investment product labels to help the consumers to choose the right products for them.
  • Restrictions on how certain sustainability-related terms (e.g., “ESG,” “green,” or “sustainable”) can be used in product names and marketing for products that don’t qualify for the sustainable investment labels
  • Several disclosures, including some to help consumers understand the key sustainability-related features of an investment product and more detailed disclosures, suitable for institutional investors or retail investors

• The UK FCA also announced the formation of a working group to develop a code of conduct for ESG data and ratings providers motivated by the increasing dependence on third-party ESG data and ratings services to comply with the various sustainable finance frameworks

Regulation - EU

• The European Banking Authority - EBA published its final Regulatory Technical Standards (RTS) on specific liquidity measurement for investment firms under the Investment Firms Directive (IFD).

• EBA published its final guidelines on the use of remote customer onboarding solutions within the scope of the Anti-Money Laundering Directive (AMLD). The Guidelines apply to all credit and financial institutions that are within the scope of the Anti-Money Laundering Directive (AMLD).

Regulation – US

• Following pandemic-related market events in early 2020, on November 2, the SEC published proposed changes to Rules 22e-4 and 22c-1, open-end fund liquidity risk management programs and swing pricing, respectively, together with changes to Forms N-PORT, N-CEN and N-1A. If adopted as proposed, the changes will be significant. The SEC has proposed a 12-month transition period for the Rule 22e-4 and related disclosures, but a 24-month transition period for the Rule 22c-1 swing pricing changes. Key changes are enumerated below:

• • Rule 22e-4:

1. 1. 1. Replace the “reasonably anticipated trade size” under “current market conditions” with a blanket stressed trade size of 10% of each investment;
      2. Remove the “less liquid” bucket and treat such investments as “illiquid,” which are subject to the 15% illiquid limit;
      3. Change the definition of “illiquid investment” to include investments whose fair value is significantly determined using unobservable input(s);
      4. Requires daily liquidity classification of investments;
      5. Mandatory HLIM for all funds of at least 10% of net assets; and
      6. Changes to HLIM and 15% illiquid limit calculations in regard to assets posted as margin or collateral or for certain derivative transactions.

• • Rule 22c-1:

1. 1. 1. Mandatory swing pricing for all funds, other than ETFs and money market funds;
      2. Amends the swing pricing framework, by specifying the amount of net inflows or net outflows that would trigger a pricing adjustment;
      3. Specifies calculation of the swing price factor adjustment; and
      4. “Hard close” requirement to determine whether an order is eligible to receive a day’s price.

• • Forms N-PORT, N-CEN and N-1A:

1. 1. 1. Conforming forms to the other proposed amendments;
      2. Form N-PORT timing changed to 30 days after month end to file with public availability 60 days after month end; and
      3. Entity identifier changes (separate line items for RSSD ID versus LEI in cases where there is no LEI).

• On October 26, the SEC published final rule “Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements.” The final rule continues the SEC’s long-running reporting modernization initiative, significantly altering the format and content of fund semi-annual and annual reports. Principal elements of the rule include:
  • “Concise” and “visually engaging,” with flexibility for “user-friendly” and “interactive” electronic versions, tagged using Inline XBRL, all in the interest of tailoring reports to retail investors;
  • Certain in-depth information, such as schedules of investments and financial statement elements, to be made available on websites and in Form N-CSR for access by professional investors and others who continue to require access to “in-depth” information;
  • Scope of Rule 30e-3 to be amended to exclude funds registered on Form N-1A; and
  • Requiring require that presentations of fees and expenses in advertisements and sales literature be consistent with relevant prospectus fee table presentations and be reasonably current.

Marine Hutinel and Nels Ylitalo contributed to this article.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.