Europe’s asset management association and the Dutch pension federation have both raised concerns about the EU’s current plan to overhaul its rules for sustainability reporting in the finance industry.
The European Commission tabled a legislative proposal in November, outlining how it wants to redesign the Sustainable Finance Disclosure Regulation (SFDR) to make it more effective at promoting sustainable investing and preventing greenwashing.
Co-legislators in Council and Parliament will spend the coming months deciding whether to accept the plans, and negotiating any further amendments.
But Pensioenfederatie has stated that, while it welcomes the overarching changes, the review also “entails risks for pension funds”.
Communication bans
“If pension funds cannot meet the conditions of categorisation – either at the level of the pension scheme or of the underlying sub-portfolios – they would be faced with strict communication restrictions,” it wrote.
IPE has previously explained these proposed restrictions, but they essentially stop financial market participants from communicating widely about the environmental or social credentials if they don’t qualify for a category under SFDR.
The criteria are anticipated to be difficult for many large funds to fulfil, even among leaders in the sustainability space.
“This would inhibit the ability of pension funds to be transparent towards their members about the responsible investment policy,” Pensioenfederatie claimed.
It added that schemes should be allowed to communicate about specific portions of their portfolios.
For example, most pension funds have minimal allocation to impact investments, so SFDR may prohibit them from telling their savers about those investments.
Pensioenfederatie wants them to be able to continue to talk about those allocations, as long as they make clear they’re not representative of their wider sustainability credentials.
It called for more coherence between the revised SFDR and proposed changes to the IORP II Directive, which regulates many of Europe’s pension funds.
The Commission has suggested that in future, pension funds covered by IORP II should be required to communicate with members about their responsible investment policies, whilst simultaneously proposing a ban on such communications for pension funds that don’t qualify under SFDR.
The Dutch regulator noted the tension between these two potential requirements.
Confusion on segregated accounts and PAI
It also called for more clarity on whether segregated accounts – which the Commission wants to remove from SFDR’s disclosure obligations – will consequently be removed from any communication bans, too.
And it wants supervisors to confirm they won’t enforce against investors that don’t undertake a Principle Adverse Impact process between now and the introduction of the new regime, which will see those requirements dropped.
EFAMA has ‘serious concerns’
The European Fund and Asset Management Association (EFAMA) also published its official position on SFDR proposals.
The industry body said it had “serious concerns” about the plan to add explicit exclusions into the ‘transition’ and ‘sustainable’ categories.
In particular, the Commission wants ‘transition’ funds to screen out companies that generate revenues from the exploration, mining, extraction or distribution of coal or lignite, and those that develop new fossil fuel projects.
EFAMA said the updated SFDR should be aligned with existing exclusion rules under the EU’s climate benchmarks and fund-naming rules, to avoid “unnecessary regulatory fragmentation”.
“For the ‘transition’ category in particular, this risks excluding the carbon-intensive sectors where transition efforts are more critical,” the body continued, adding that analysis suggests up to 95% of the global energy sector would be banned from ‘transition’ funds under the proposals.
More than half of all emerging market utilities would also be excluded.
“Excluding carbon-intensive sectors from transition-categorised products does not accelerate decarbonisation,” said EFAMA’s senior policy advisor, Anyve Arakelijan.
“It simply creates a Transition category that finances the already-green, rather than the actively transitioning.”
Pensioenfederatie supports the Commission’s new exclusion list for SFDR in principle, but wants clarity on how investors are expected to deal with instances in which a company breaches it after being added to the portfolio.
Both positions have been published in a bid to influence the thinking of the European Parliament and Council as they develop their individual positions.
Draft approaches are expected to be published by both bodies before the summer, and political negotiations will begin later in the year.
