The European Commission has published a Summary Report summarising the responses to its September 2023 consultations on the Sustainable Finance Disclosure Regulation (SFDR).
Although the Summary Report does not include any indication of the Commission's thinking or possible future changes, it provides a useful (and sometimes surprising) insight into the industry's views on SFDR and the future of the EU's sustainable finance regime.
The Commission notes:
- Support for setting uniform disclosures for all financial
products in the EU plus additional reporting for products making
sustainability claims.
- Support for a categorisation system.
- Split responses on whether to convert Articles 8 and 9 into
categories or use new criteria.
- Support for a transition focus category.
The Summary Report does not provide any indication of when any new rules might be published but we do not expect this to be until after the new European Commission is in place at the end of this year at the earliest.
We set out below some more details on the key messages from the Summary Report.
- The September 2023 consultations
- General views on the SFDR Regime
- Changes to disclosure requirements
- Categorisation system for financial products – the future of Articles 8 and 9
1
The September 2023 consultations
The September 2023 consultations (which comprised a Targeted Consultation and a Public Consultation) included a series of questions on the possible reform of the SFDR with a particular focus on addressing shortcomings and making it more user friendly. No concrete proposals were suggested but the questions covered a diverse range of matters including the introduction of a potential categorisation system; the possibility of product level disclosure requirements for all financial products offered in the EU; and a reworking of the SFDR disclosure requirements.
We discussed the September 2023 consultations in more detail in our briefing: Possible changes to the EU SFDR? The European Commission seeks views | Travers Smith.
2
General views on the SFDR Regime
- General support for SFDR: Respondents were
overwhelmingly supportive (89%) of the broad objectives of the SFDR
and the need for sustainability disclosures. There was also a
similar level of support (94%) for measures at EU, rather than
national, level.
- Significant limitations to the current regime:
Respondents identified a number of problematic areas
including:
- Costs of complying with the disclosure requirements are not proportionate to the benefits provided.
- Lack of legal clarity regarding key concepts such as "sustainable investment".
- Limited relevance and usefulness of certain disclosure requirements.
- Difficulties in obtaining good quality data with 98% of respondents experiencing difficulties.
- Difficulties with the requirements around the principal adverse
impact regime including the unclear interaction between the
principal adverse impact product and entity level
disclosures.
- Use of SFDR as a labelling and marketing tool: A very
high majority of respondents thought that SFDR was being used as a
labelling and marketing tool (particularly Articles 8 and 9) rather
than being limited to its intended function as a disclosure tool.
This is consistent with our own understanding.
- Need for consistency across EU legislation: A need for consistency between SFDR and other EU sustainable finance requirements was identified such as those in the EU Taxonomy Regulation and possible alignment of SFDR pre-contractual disclosures with the PRIIPs KID.
3
Changes to disclosure requirements
- Application of disclosure requirements to all financial
products: There was majority support (56%) for standardised
disclosure requirements for all financial products, regardless of
their sustainability claims i.e. including Article 6 products. This
was surprising.
- Two levels of disclosures: Generally applicable
disclosures should be limited to "key meaningful
indicators", possibly focused on climate, diversity and human
rights, with additional disclosures for products making
sustainability claims.
- No entity-level disclosure requirements in SFDR: Most
financial market participants and financial advisers did not
consider it appropriate to include entity-level disclosure
requirements in the SFDR. There were also split opinions on how
useful such disclosures are in practice.
- Simplified entity-level disclosure requirements: Most respondents supported simplifying the entity-level requirements and streamlining these across different pieces of EU legislation. Potential changes included focusing principal adverse impact reporting requirements on material issues or on a reduced number of cross-sectoral indicators.
4
Categorisation system for financial products – the future of Articles 8 and 9
- Support for EU categorisation system: There was strong
support for the establishment of a voluntary EU categorisation
system for financial products. It therefore seems likely that this
will be adopted in some form.
- Roughly even split between new categorisation or 8/9
categorisation: There was a slight preference for a new
categorisation scheme, but the results were close. The majority of
respondents from the asset management industry supported scrapping
the Articles 8 and 9 categories in the SFDR and creating a number
of new categories of products based on investment strategy. (This
contrasts with feedback we have received from the alternative asset
management industry, which preferred categories based on Articles 8
and 9 on the basis that, despite their shortcomings, they were at
least known quantities.)
- Approach to new categories: The suggested approaches
to categorisation in the Targeted Consultation received differing
levels of support.
- Relatively little support for a specific category for products
that follow an exclusion strategy on the basis that negative
screening is already a common ESG strategy.
- Significant support for a specific category for products with a
transition focus.
- Significant support for categories to be based on investment
goals rather than investment strategies.
- Support for categories to be easily understandable by retail
investors.
- Relatively little support for a specific category for products
that follow an exclusion strategy on the basis that negative
screening is already a common ESG strategy.
- Use existing framework: Any criteria and indicators should, where possible, leverage the existing sustainable finance framework.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.