On July 4, ISDA submitted a response to the European Supervisory Authorities’ (ESAs) consultation on suggested amendments to the regulatory technical standards under the Sustainable Finance Disclosure Regulation (SFDR). ISDA emphasizes the need to develop a common methodology for the measurement of derivatives across the various key performance indicators in the EU taxonomy, SFDR regulations and the Markets in Financial Instruments Directive’s sustainability preferences framework. ISDA requests that the ESAs grant the industry additional time to reach a consensus on this topic in the context of the forthcoming deliberations of the ad hoc expert group on derivatives under the EU’s Platform on Sustainable Finance 2.0, to avoid fragmented approaches that could lead to sub-optimal outcomes.
In the response, ISDA highlights that the proposed conversion methodology will provide a useful reference point for assessing exposure calculations for various derivatives products and provides a very detailed view of the different approaches. The response also recommends a consistent metric across the three ratios: principal adverse impact (PAI); taxonomy; and sustainable investments, as well as a consistent treatment of derivatives in the numerator and denominator of the relevant environmental, social and governance ratios to avoid inconsistent outcomes.
The response further highlights that derivatives that must be included in the PAI numerator are those whose underlyings are companies’ equity and corporate debt that can create an impact and can be assessed against the EU taxonomy, proportionate to the exposure they offer to the underlying.