Introduction
The Sustainable Finance Disclosure Regulation1 (SFDR) was introduced, alongside other regulations, as part of a package of legislative measures arising from the European Commission's (Commission) action plan on financing sustainable growth. It entered into force on 10 March 2021, and is now part of an EU sustainable finance framework that includes in particular (i) Commission Delegated Regulation (EU) 2022/1288 of 6 April 20222 which provides a standardised framework for compliance with the disclosure duties set out in SFDR and (ii) the EU Taxonomy3 (collectively, the SFDR Framework).
The SFDR Framework requires 'financial market participants'4 (FMPs) and financial advisors (within scope of the SFDR) in the European Union (EU) to disclose, inter alia, how environmental, social and governance (ESG) factors are integrated and/or promoted in the investment process of 'financial products'5 (FPs) they manage/advise, both at FMPs/financial advisors and FPs levels.
With the objective of conducting a comprehensive assessment of the SFDR Framework, Commissioner Mairead McGuinness organized, between September and December 2023, open and targeted consultations in which stakeholders could share their perspectives on the current state of play and their expectation for its future. Forty-five questions were asked throughout the consultations, divided into 4 thematic sections.
In total, 324 organisations and individuals participated in the targeted consultations, mostly FMPs, financial advisers, and non-governmental organization (the NGOs), predominantly from EU Member States.
On 3 May 2024, the Commission published a summary of the responses received in the course of the consultations, noting that this summary does not reflect the views of the Commission itself. Below is a high-level overview of the feedback received by the Commission on some of the key issues covered by the consultations.
Current requirements of the SFDR Framework
If respondents largely agree that the relevance of the SFDR Framework is no longer in question, they totally or mostly agree that it is not being used solely as a disclosure framework, as intended by the European legislator, but is also being used as a labelling and marketing tool.
Regarding its effectiveness in protecting end investors, the framework currently lacks clarity in its requirements and concepts, such as the concept of "sustainable investment" under the SFDR, making it challenging for financial actors to comply with the said requirements. This could lead to legal uncertainties, as well as reputational risks for FMPs and financial advisers, and risks of greenwashing and mis-selling.
One of the main difficulties brought to the table by respondents is obtaining high-quality data which is key to complying with the disclosures and reporting requirements under the SFDR Framework. Many respondents reported that they were engaging extensively with investee companies to encourage reporting of missing data.
When asked about the cost of the required disclosures under the SFDR Framework, more than half of the respondents indicated that they do not consider it proportionate to the benefits generated.
Interaction with other pieces of sustainable finance legislation
The SFDR Framework integrates and/or interacts with a wide range of EU directives and regulations, through the introduction of new regulations or amendments to existing ones. Among these can be listed, inter alia, (i) the Benchmarks Regulation6 (BMR) (ii) the Corporate Sustainability Reporting Directive7 (CSRD), (iii) the Markets in Financial Instruments Directive II8; and (iv) Insurance Distribution Directive9.
The SFDR Framework is a wide EU nexus of directives and regulations which should work together, in particular to ensure common and clear disclosures to retail investors. Respondents highlighted the necessity of aligning certain definitions between these pieces of legislation, in particular between the SFDR, the EU Taxonomy, and the BMR, in order to prevent confusion among retail investors. For the CSRD, the same conclusion was reached: the definitions need to be further harmonised, and there is still room to streamline FMPs-level disclosure requirements under the SFDR and the CSRD, especially regarding the future sectoral European Sustainability Reporting Standards (ESRS) for use by all companies subject to the CSRD.
Potential changes to disclosure requirements for FMPs and financial advisors
Entity-level disclosures
There is definitely a split across the different respondents' groups on whether the SFDR is the right place to set entity-level disclosure requirements for FMPs and financial advisors. While most FMPs and financial advisors do not consider it to be the right one, a majority of NGOs did express their support in having such disclosures. The usefulness of the 3 sets of the SFDR entity-level disclosures is also a split (the sets being: sustainability risk policies, sustainability impacts and remuneration policies), those in favour claimed that they provide valuable information to investors and the civil society, allowing them to assess the sustainability ambition of an FMP/financial advisor and serving as a tool against greenwashing, whereas those against claimed that they are not appropriate or useful to end-investors.
Product level disclosures
Half of the respondents agree that the EU should impose uniform disclosure requirements for all FPs offered in the EU, regardless of their sustainability claims. They argue that it would avoid sustainable FPs to be disadvantaged by more reporting burdens and costs as well as enhancing transparency and comparability for investors. But some expressed the opposite view, as it would in their opinion impose unnecessary costs on products without sustainability claims. When asked about what these disclosures should be, respondents mostly mentioned climate, diversity, and human rights as topics to be covered by such disclosures.
If most of the respondents agree that FPs with sustainability claims should be required to substantiate their claims with additional disclosure to ensure credibility and prevent greenwashing, there is less support among the respondents for imposing uniform disclosure requirements for some financial products regardless of their sustainability-related claims.
Potential establishment of a labelling system for FPs
Views on the potential establishment of an EU labelling system
Respondents largely support setting up a labelling system regulated at the EU level, which they believe is necessary for an efficient distribution system based on investors' sustainability preferences, to combat greenwashing, and to facilitate professional investors and retail investors understanding of products' sustainability-related strategies and objectives. Also, respondents supported the introduction of product labels being accompanied by specific rules on how market participants must label and communicate their products.
In such a scenario, where a labelling system is launched, respondents favoured including the relevant label in key information documents for packaged retail and insurance-based investment products, in an effort to further ensure that retail investors have access to uniform disclosures. Furthermore, were new EU ESG benchmarks be developed, a majority of respondents indicated their expectation that the criteria applicable to such benchmarks be closely aligned with the criteria applicable under the labelling system, noting that any fund tracking an EU climate benchmark (i.e., Paris-aligned benchmark/ Climate transition benchmark) should automatically fall under one of these future labels.
General views on the two proposed approaches
Respondents were asked whether they would prefer:
- Approach 1: a system that splits labels in a different way than according to existing concepts and categories under the SFDR (the so-called Articles 6, 8 and 9 categories under the SFDR); or
- Approach 2: a labelling system converting the above mentioned SFDR categories into formal product labels, clarifying and adding criteria to underpin the existing concepts of the SFDR.
Ultimately, no clear preference was found among respondents, but a large number indicated they would be in favour of a hybrid approach combining established SFDR concepts and categories with a voluntary labelling framework.
Next steps
Following the European Parliament elections, the new Commission is expected to publish a full review report with possible proposals for amending the SFDR by the end of 2024, although the priorities of those newly elected at the European Parliament will definitely be key in shaping the timing and the substance of any amendments. Firms will be keeping a close eye out for the report particularly as regards the possibility of the EU establishing a labelling system.
Footnotes
1 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.
2 Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of 'do no significant harm', specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in precontractual documents, on websites and in periodic report.
3 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment.
4 As defined under the SFDR.
5 As defined under the SFDR.
6 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.
7 Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022, as regards corporate sustainability reporting.
8 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.
9 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution.
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