The Autorité des Marchés Financiers (AMF) has made a slew of recommendations to strengthen the credibility of the next iteration of the Sustainable Finance Disclosure Regulation (SFDR).
The French financial regulator published a report on Thursday laying out the views of a working group which includes representatives from many of the country’s banks, asset managers, NGOs, universities and government departments.
The document focuses on two of the most controversial proposals on the table for SFDR 2.0: the inclusion of a category for ‘transition’ assets, and the introduction of a more flexible approach to disclosing the negative environmental and social impacts of a fund (known as PAIs).
On the former, the European Commission wants “credible” transition plans to be one method for investors seeking to demonstrate their assets or portfolios qualify for the proposed Article 7 category.
But AMF’s working group agreed that the term “credible” was too loose and legally ambiguous.
“It should be accompanied by explicit common minimum criteria and refer to an associated framework or standard,” it recommended.
“Credibility implies evidence: it can only be assessed against a recognised authority or standard. It is essential, first and foremost, to define the criteria for this ‘credibility’, and a change of terminology to require a ‘robust’, ‘coherent’ or ‘high-quality’ transition plan would not resolve the fundamental issues.”
Specifically, the group recommends that a credible transition plan should be based on a “recognised framework regarding compatibility with the Paris Agreement”, include clear decarbonisation targets – including Scope 3 goals – and be able to point to past efforts to cut emissions.
“The past trajectory and future targets must be directly linked to the measures put in place and planned, and supported by concrete evidence,” it continued, pointing to existing financing efforts and the incorporation of targets into governance measures.
The report suggests that issuers could disclose the proportion of capital expenditure they allocate to polluting activities, so that stakeholders can assess how aligned the stated transition commitments are with actual business decisions.
PAIs
AMF’s working group also made a series of recommendations about the future of PAIs within SFDR. The Commission has proposed mandatory disclosure of PAIs for ‘sustainable’ and transition’ portfolios, and promised to create a list of credible indicators once the legislation has been agreed.
European Parliament, on the other hand, looks set to push for a more complex regime combining mandatory and voluntary PAIs.
The report supported the Commission’s approach, but recommended “rethinking the indicators as a whole rather than simply ‘cherry-picking’ from the current list”.
It said portfolios with a significant allocation to carbon-intensive assets should have to disclose “mandatory sector-specific PAIs”.
AMF’s report, which was developed between March and June this year, has been approved by its board.
