EU consults on SFDR application

The European Commission has initiated a consultation regarding the future of the EU’s Sustainable Finance Disclosures Regulation (SFDR). This move suggests a shift towards a sustainability product categorisation scheme, possibly eliminating the distinction between the existing Articles 8 and 9 from the transparency framework.

The 44-page consultation delves deeply into the interactions between SFDR and other sustainable finance legislation, such as the Corporate Sustainability Reporting Directive (CSRD). The Commission has also raised questions about possible amendments to the existing disclosure mandates.

Strategies for a new categorisation system

The consultation document highlights the possibility of greenwashing due to the prevalent use of SFDR as a labelling mechanism. As a solution, it invites feedback on two overarching strategies for the development of a robust categorisation system:

1. Transformation of Articles 8 and 9: This would entail formalising Articles 8 and 9 into specific product categories, while further elaborating on their inherent concepts, such as sustainable investment and the principle of “do no significant harm”.

2. Out with the old: This new approach might focus on types of investment strategies, similar to the UK’s Sustainability Disclosure Requirements, as opposed to adhering to the current SFDR concepts. As the Commission states, “In such a scenario, concepts such as environmental/social characteristics or sustainable investment and the distinction between current Articles 8 and 9 of SFDR may disappear altogether from the transparency framework”.

Industry reception of the consultation

The consultation, by and large, has garnered support from the industry. However, there are voiced concerns over a total revamp of the existing framework. The financial sector has invested significant resources and effort into assimilating the existing rules. Despite this, the vast disclosure range under Articles 8 and 9 has ushered in a notable inconsistency in its application. Current disclosures are perceived as ineffective, failing to cater to the needs of both retail and institutional investors. This has driven the general consensus that profound change is needed.

The consultation closes on 15 December.

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