The European Commission has closed a call for evidence on the future of the EU Sustainable Finance Disclosures Regulation (SFDR) on Friday.
It received nearly 200 responses from investors, banks, NGOs, membership bodies and citizens, all with thoughts about how to improve the beleaguered transparency law, which seeks to prevent greenwashing by requiring fund managers, and others, to provide evidence of their sustainability claims.
Most of the submissions welcomed the Commission’s plan to turn SFDR into something more akin to a labelling regime, instead of keeping it as a straight disclosure framework.
But in addition to the three proposed new categories (‘sustainable’, ‘transition’ and ‘ESG collection’), many respondents called for one dedicated to impact investing.
The German alternative investment association, BAI, has produced a position paper on the topic, which it included in its submission.
“Regulators have difficulties recognising impact investing as a valid sustainable investing strategy due to their difficulties or lack of understanding coupled with their focus on combating greenwashing practices,” it wrote.
Despite this, BAI continued: “Impact investing is central to achieving policy goals across Europe.” It noted that the Commission should “recognise impact investing as a concept in a non-binding recommendation to create a ‘safe space’ for the further development of the impact investing market in Europe”.
Calls for reductions and carve-outs
Schroders, which also wants a separate regulatory category for impact investments, said in its submission that there was “a disconnect between the costs of compliance with certain disclosure rules and their value to end investors”.
To help tackle the problem, it called on the Commission to reduce the level of detail SFDR demanded, and introduce carve-outs for unregulated alternative investment funds marketed exclusively to professional investors, who – Schroders argued – cannot access data for their unlisted holdings, and whose clients do not need protecting from greenwashing.
The Swedish Investment Fund Association wants segregated mandates to be excluded from the scope of SFDR, and so does BlackRock, the world’s largest asset manager.
Calls for additions, including for a ‘no claims’ category
Meanwhile, BNP Paribas demanded an extension to the scope of SFDR to capture structured products, which are currently excluded.
France Invest wants the Commission to introduce a ‘no claims’ category product for managers with clients “who do not wish to invest in products referencing any level of ESG ambition”.
“This is especially true, given the anti-ESG movement developing in the United States, where some North American investors request to no longer receive ESG reporting and significantly disengage from ESG topics,” said the membership body, which represents venture capital, private equity, infrastructure and private debt specialists in France.
“In this context, such ‘no claims’ products should not be subject to any minimum obligations in terms of transparency in sustainability disclosures, binding ESG commitments or ESG reporting, etc,” it argued.
Meanwhile, the Dutch Fund and Asset Management Association (DUFAS) has insisted that all financial products should disclose at least some information as part of SFDR, to make sure sustainability funds are not hit with additional reporting burdens just for being sustainable.
Those disclosures should relate to the adverse impacts of the investment portfolios, DUFAS has suggested.
More consideration for pension funds
It has also urged the Commission to ensure that any new labelling regime does not exclude pension funds with long-term, multi-asset products that do not fit easily into one of the three proposed categories.
DUFAS wants SFDR to allow such pension funds to report on the relevant parts of their total portfolio, rather than being excluded completely and therefore banned from communicating to members about their sustainability credentials.
“This would also make sense from the perspective that pension funds outsource large parts of the management of their assets to external asset managers,” it added in its submission.
“These portfolios qualify as separate products under the SFDR allowing the asset managers to apply a specific category to such portfolios.”
Next steps
Given the importance of the SFDR in Europe, the call for evidence was surprisingly brief and unstructured.
Insiders said that was because it was done reluctantly, by policymakers who were already clear on what they would do with the redesign after years of market feedback.
However, as the Commission’s decision to skip the stakeholder consultation process for its sustainability ‘omnibus’ is currently being investigated by the European Ombudsman, it is under pressure to adhere – however unwillingly – to formal procedure.
The final proposal for SFDR is slated for the fourth quarter, but changes likely to be introduced to the Corporate Sustainability Reporting Directive and the Taxonomy Regulation as part of the Omnibus may affect the timeline and outcome.
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