The European Commission recently published its two consultations (public and targeted) with the intention of revising the SFDR’s implementation in September. Amongst other considerations, this consultation focused on the key improvements required to the current regime, including but not limited to:
Combatting greenwashing and mis-selling of financial products using fund naming and marketing conventions specific for sustainable finance
Making SFDR reporting efficient through consideration of digital and machine-readable disclosures and submissions
Streamlining entity-specific disclosures by re-examining the utility of Principal Adverse Impact (PAI) reporting at entity-level rather than fund-level
Filling the market gap for labelling of sustainable products using specific product categorisations either aligned to, or completely overhauling the current reporting framework.
More information on the consultation itself can be found in our blog post from September, linked here.
The Commission’s SFDR Webinar
On 10 October, the European Commission held an online seminar to answer key industry questions on the SFDR consultations and provide more visibility to market participants on the calendar for implementation.
Of the ~700 attendees surveyed during the online seminar, approximately:
66% believe that SFDR disclosures have created more confusion than clarity, raising the risk of greenwashing. This echoes our findings in June, linked for you here.
60% would require the proposed product categories to cover all financial products in the market, regardless of whether they have a sustainability claim or not.
42% would envision the product categories to be built on the current Articles 8 and 9 of the SFDR, with included minimum criteria for labelling.
The Commission organised two panels consisting of stakeholders from market participants, industry bodies, National Competent Authorities (NCAs), and the European Supervisory Authorities (ESAs).
This wide-ranging discussion included considerations on the following:
Retail vs Institutional Investors: There was general agreement that retail investors may require more support in comprehending the very technical disclosures currently required of financial market participants and financial advisers under the SFDR. Furthermore, given the complexity of interpreting the SFDR regulation for all stakeholders involved, there needs to be greater capacity building around improving not just financial literacy, but more specifically SFDR literacy across the board.
Levelling the playing field: For investors to effectively compare across different financial products and make an informed choice, the merits of disclosure under the SFDR being extended to all financial products in the market were heavily debated. Additionally, a level playing field would also enable cost equivalence, as sustainable funds are currently more expensive for investors.
Transition to a low-carbon economy: Whilst all panellists agreed that the SFDR has been helpful in engendering transparency and accountability within the sustainable finance universe, the success of the SFDR regime in supporting mobilisation of capital towards decarbonising portfolios was a point of significant contention. Proposals to remedy this included more disclosures on greenhouse gas emission reductions from financial market participants.
Inclusion of clear minimum standards: The panellists also suggested that the SFDR regulation needs to be clearer in setting minimum standards for labelling and disclosures, as well as any potential exclusionary strategies in consideration.
Greenwashing in Article 6 and 8: Patricia Dunne, representing the Central Bank of Ireland, pointed out that from a regulatory standpoint, Article 6 and 8 products do not exhibit distinctive differences in their investment compositions. While some financial products may demonstrate higher sustainability practices compared to certain Article 8 funds, they are classified at Article 6 due to the adoption of a more conservative approach. This lack of clearly defined minimum standards for both types of products heightens greenwashing concerns significantly.
Article 2(17) of the SFDR, the ‘sustainable investment’ definition: The interpretation of the term across the industry has been varied, with there being no currently harmonised understanding of the term. The concept and its usability therefore generated heated debate during the online seminar amongst panellists, with some highlighting that the definition should as a minimum map to the Taxonomy for more clarity. Others contrastingly highlighted that the flexibility in interpretation of the term allows for greater innovation within the market, so as to have better product differentiation.
What is next for the consultations?
The panel discussions, and the myriad questions posed to the Commission during the session were a particularly good temperature check of where market participants wanted the Commission to focus their efforts when revising the current SFDR framework. However, for now, the current team at DG FISMA is fully focused on closing the two current consultations and preparing a staff working document to interpret the responses.
Given the European elections next June, the FISMA representatives were unable to comment on a specific timeline for the resultant legislative proposal. It was clear that the next Commission would be the one to determine the exact timeline of any legislative revisions to the SFDR. Therefore, despite the ongoing consultations, we anticipate no further changes to the current SFDR disclosure regime until next summer at the earliest.
Until then, there is much you can do to ensure that your disclosures are meeting the current regulatory standards. Get in touch with Coralie Nelson (email@example.com) for more information and to discuss how Novatus Global's ESG team can support you.