SFDR Public Consultation - September 2023

15 Sept

The EU Commission launched a public consultation on the future of SFDR on Thursday 14th September 2023.

What it’s all about

The consultation is focused on legal certainty, the usability of the regulation and its ability to play its part in tackling greenwashing. The consultation is split into two parts:

Public Consultation – aimed at a broad range of stakeholders, seeking views on how SFDR works in practice. Questions include:

Whether SFDR worked well at the EU level, or if measures should have been conducted at a member state level.
Whether costs of disclosure are proportionate to benefits it generates (channelling capital towards sustainable investments).
The extent to which the disclosure framework has ended up being used as a labelling and marketing tool.
How useful the disclosures actually are.
Applicability / materiality of the PAIs.
Investigation into the true cost of disclosure including between product and entity level.
Ability of participants to find good-quality data and understand data requirements.
Interaction with other parts of the EU sustainable finance framework (e.g. CSRD).

Targeted Consultation aimed at stakeholders who are more familiar with SFDR and the broader EU sustainable finance framework as a whole. This addresses all questions in the public consultation above, as well as additional focus areas (of particular interest is whether SFDR might one day be reformed into a labelling regime):

The usefulness of entity level disclosures (Articles 3, 4, 5)
Whether the EU should impose uniform disclosure requirements and PAIs for all financial products offered in the EU, regardless of their sustainability-related claims, and if so, what those disclosures should include.
Whether disclosures should be completely public or permitted to be shared selectively.
Which elements of the disclosures should be required vs. optional.
To what extent disclosures should be machine-readable, searchable and ready for use.
Whether there is a need for product categories (labels), and if so:

What those labels should be and how many.
What kind of additional and minimum criteria should be applied.
Whether the concepts of A8 and A9 should disappear if new labels were created.
Whether there is a need for measures to support the transition to a new labelling regime.
What governance system should be created to oversee labels.
Potential consequences of establishing product labels.

Our view

We are broadly very supportive of this consultation, and we feel that the EU Commission has included questions that appear to address some of the key challenges we’ve faced when building SFDR frameworks with our clients over the past 2.5 years.

The EU Commission has recognised that Articles 8 and 9 are being used as de facto product labels, and that there is a proliferation of national ESG/Sustainability labels, suggesting a market demand for such tools. However, they warn of concerns that the current market use of SFDR as a labelling scheme might lead to risks of greenwashing and are keen to understand market participant views on this point.

Our concern with converting SFDR into a labelling regime is that it’s likely that doing so would come with additional criteria to underpin the existing concepts of environmental/social characteristics, sustainable investment and DNSH etc., or other new criteria, and we believe the current flexibility of the disclosure focused framework allows more managers to participate. We’d also be keen to see appropriate measures to support the transition to a new regime if implemented, to avoid confusion in the market.

What next

Feedback has been requested by 15th December 2023. We plan to take an active role in providing feedback to both AIMA and UKSIF, and are happy to discuss with you along the way to hear your thoughts.

The EU Commission has not made any commitments to make specific changes to the SFDR framework at this point. This is simply an information gathering exercise. Any changes made we believe would be granted a good lead time to absorb.

We have registered for a webinar that the Commission is holding on 10th October called “The Sustainability Finance Disclosure Regulation - what next?”, after which we will share further updates.

We look forward to seeing where this will go.