Dutch supervisor Authority for the Financial Markets (AFM) has backed proposals to abolish the Article 8 and 9 categories for investment funds under the Sustainable Finance Disclosure Regulation (SFDR).

The body published its position on the future of the controversial European Union regulation, which was created to force fund providers to be more transparent about how they approach sustainability in their products.

AFM has been among those to have highlighted the misuse of SFDR by the investment industry. Providers can categorise their sustainability-focused products as ‘Article 8’ – having social or environmental characteristics – or ‘Article 9’ – pursuing social or environmental objectives.

They should then disclose appropriate information to explain that approach.

But asset managers have instead used the two categories as proxy fund labels in order to tout their sustainability credentials to potential clients, raising concerns that SFDR is exacerbating greenwashing, rather than reducing it.

AFM highlighted a number of cases in which fund providers “g[a]ve the impression that such classifications had been assigned by a third party” in a report published over the summer.

The European Commission recently stopped insisting SFDR must remain a disclosure framework, and is now proposing an overhaul that could transform it into a labelling regime.

AFM said its most recent paper, published on Thursday, “proposes improvements to the framework to make it more meaningful to investors and the objective to reorient capital flows to where impact is made”.

Along with ditching the Article 8 and Article 9 categories, the supervisor wants the EU to “introduce sustainable product labels that investors can understand, such as ‘transition’, ‘sustainable’ and ‘sustainable impact’”.

The UK’s Financial Conduct Authority is currently considering its own trio of fund labels, which appear to follow the same principles: ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’.

The AFM wants each of its three labels to include “specific minimum quality and disclosure requirements”. Funds that don’t identify as sustainable should also be forced to disclose on a “limited number of sustainability indicators” focused on capturing negative impacts, it said.

The heads of the Dutch Federation of Pension Funds, Association of Insurers and Banking Association also waded into the debate about the EU’s sustainability rules last week, but this time it was the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D).

Ger Jaarsma, Richard Weurding and Medy van der Laank, respectively, penned a joint letter to those developing the new law, asking them to “bring financial institutions in scope of the CS3D based on the risk-based approach from the OECD Guidelines”.

CSDDD will be debated in a trialogue this month, with the inclusion of the finance sector expected to be one of the most controversial topics on the agenda.

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