On 14 September 2023, the European Commission unveiled two pivotal consultations pertaining to the Sustainable Finance Disclosures Regulation (SFDR). These papers, tailored for both the public and SFDR-specific stakeholders, mark a significant step towards refining the existing SFDR framework and aligning it more seamlessly with the EU’s broader sustainable finance initiatives.
When we released our report 'Is the SFDR causing clarity or confusion' it was clear that further detail and information from the regulator would needed in order for firms to be compliant with the rules. These consultations, and their results, will hopefully go some of the way to giving this.
What does the consultation entail?
The EU has published two corresponding consultation papers, a public consultation and a targeted consultation.
The targeted questionnaire essentially covers the initial portion of the public-focused consultation paper, as well as an additional set of detailed questionnaires on the categorisation system for products and changes to disclosure requirements. Hence, as the overarching paper, we shall focus on the proposed discussions within the targeted consultation.
What elements of the current framework are in scope for changes as per the current consultation?
The Commission is seeking insights and market perspectives on various aspects of the current SFDR framework. Some notable changes post-consultation may include:
Categorising Sustainable Products:
Whilst the SFDR was initially designed to be a disclosure regime, the Commission recognises its current use as a labelling scheme, and has inferred there might be appetite within the market to create a product categorisation scheme. In this vein, the Commission is considering new avenues for categorising all in-scope products. The two new proposed approaches:
Approach 1 – Splitting categories: either by focusing on the type of investment strategy pursued by the product, or contribution to certain sustainability objectives.
Approach 2 – Converting: changing Article 8 and 9 into formal product categories at the outset, and clarifying labelling to underpin such things as existing E/S characteristics and do no significant harm (DNSH) criteria.
Market commentators have widely noted that the categories proposed in Approach 1 map broadly to those considered by the FCA for the upcoming Sustainable Disclosures Requirements (SDR, which has been pushed back to 4Q 2023 as per the latest Regulatory Initiatives Grid).
Streamlining Entity-Specific Disclosures:
Many firms are rethinking the viability of completing both product-specific and entity-specific PAI disclosures, with the utility of the latter being a point of debate in the financial services industry. The EC has picked up on this discussion, and has proposed a streamlining of entity-related disclosures, asking participants to consider whether the SFDR is the right forum to be collecting entity-level data.
Ongoing discussions within the European regulatory bodies regarding reviews of the AIFMD and UCITS have identified provisions for investment fund names to be ‘fair, clear and not misleading’. As part of this push, the Commission has given significant consideration within the consultation paper towards specific rules regarding fund name and marketing communications. The use of certain terms within communications may be tied to specific product categories, or be prohibited if the underlying criteria are not met, in order to minimise greenwashing risk.
Balancing Disclosure Burdens:
The Commission is considering a review of the current set of disclosures mandated for funds under Article 8 and 9, with the rationale that there is currently an additional burden on Article 8 and 9 products. One of the proposed solutions includes potentially making disclosures mandatory for all funds rather than just for Article 8 and Article 9 funds. Additionally, the Commission is also considering making the number and type of required disclosures dependent on the specific category of product or investment.
Importantly, the Commission is also enquiring whether market participants and users of SFDR disclosures would find it easier for these to be digitised and machine-readable. This will be highly beneficial for stakeholders from a comparability and usability point of view, as well as paving the way for reporting efficiencies.
What are my immediate actions?
The consultation papers are mainly for the purposes of the European Commission gathering feedback from stakeholders around what can be done to make SFDR implementation more efficient, harmonised and useful.
For now, the consultation is not explicitly proposing any draft rules. Firms within the scope of, or that have been reporting under the SFDR, are not yet required to make substantial changes to their plans for FY 2023 reporting given the questionnaire.
The consultation period is set to conclude on 15 December 2023, with a detailed draft of proposed changes expected after.
From our extensive discussions and roundtables with clients, one thing is clear – there are substantial concerns around the effective implementation of the existing SFDR framework. As the SFDR evolves, it's imperative to stay ahead of the curve.
Our ESG specialist team at Novatus Global closely follow the regulatory developments, and are ready to share comprehensive insights on how these changes will impact your products. Contact Coralie Nelson - firstname.lastname@example.org, to discuss more.