The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) recently published their Opinion on the assessment of the Sustainable Finance Disclosure Regulation ("SFDR", link to the Opinion in the comment section). Currently the European Commission is considering what to do with the SFDR as the current regime appears to not work in practice as intended.
As the market demands a categorisation / labelling system (and the UK have already introduced one), the ESAs main recommendations go into the same direction:
All financial products with ESG ambitions should be put into one of two categories, one called "sustainable" (with rather high standards) and the other "transition" (with the ambition to reach the higher standards). All other products should be sub-categorised into those with and those without any sustainability features (these would need to disclose on their negative impact on sustainability).
A grading system should be introduced similar to an energy consumption score (see picture).
Besides these main proposals, ESAs also believe that a more prescriptive definition of "sustainable investment" should be introduced, and that structured products should make disclosures pursuant to the SFDR.
Recognising that the current system is too complex, difficult to understand and does not quite work as intended is certainly a first step into the right direction, and admitting that labels are required instead of overly complicated disclosures is laudable. It appears, however, that the proposals are only drafted with retail investors in mind, whereas in practice mostly institutional investors drive sustainable finance. Whether professional investors would have any benefit from the grading system appears doubtful and the obsession with consumer protection seems to overshadow all other aspects. It is also difficult to conceive that the two categories can work for all asset classes, and other shortcomings such as how to align SFDR with MiFID or CSRD aspects are not even mentioned.
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