Divisions have emerged among Europe’s pension funds and asset managers over what should happen to the EU’s flagship anti-greenwashing regulation.

The European Commission will close a consultation on its plans to overhaul the Sustainable Finance Disclosures Regulation (SFDR) this week, but market feedback already indicates a lack of consensus about how to move forward with the controversial rules.

Originally intended to be a disclosures regime that would force fund providers to ‘say what they do and do what they say’ on sustainability issues, SFDR has already been subject to a slew of updates and clarifications to try and make it more usable.

“There will always be teething issues with new regulation,” said Leo Donnachie, senior policy manager at the Institutional Investor Group on Climate Change (IIGCC). “But there are clearly some particularly big challenges for investors trying to implement SFDR.”

One of the key complaints is that SFDR asks investors to assign sustainable funds to one of the two categories, known as Article 8 and Article 9, but aren’t provided with clear definitions about which assets can credibly fit under each.

Donnachie said that this lack of clarity is particularly problematic when it comes to assets that contribute to the climate transition, rather than those that are already ‘green’ – aconcerns that were also raised this week by the Dutch pension fund federation, PensioenFederatie.

“We are convinced that financial institutions can make the biggest impact by financing the transition, rather than being invested in companies that are already sustainable,” it said in its response to the Commission’s consultation. “This approach is currently not sufficiently recognised by the SFDR and therefore it does not encourage the best use of capital.”

SFDR has also been criticised for being impractical regarding some of its requirements to collect and disclose data. In addition, concerns have been raised that Article 8 and 9 are being touted by some asset managers as official EU fund labels, encouraging greenwashing rather than reducing it.

New options proposed

The Commission has acknowledged the need to review the legal foundations of the SFDR – known as Level 1 – to address these frustrations, and has proposed two new options in its consultation.

The first is to flesh out Articles 8 and 9 by adding in qualifying criteria, and the second is to scrap the two categories completely and instead create an official labelling regime based on funds’ sustainability strategies. The requirements to disclose under SFDR would remain in place either way.

The Dutch pension federation, whose position was published in partnership with APG, PGGM and MN, said it favoured the latter approach.

“We do not believe that tinkering with Article 8 and 9, or introducing categorisation next to Article 8 or 9, will solve the unintended consequences,” it wrote in its consultation response, adding that making the two categories more complicated could encourage further greenwashing.

“Attempting to ‘improve’ Article 8 and 9 by adding minimum requirements will also give rise to problems for pension funds,” it went on, noting that many of the requirements being suggested are based on public equities strategies. This would put pension funds with higher allocations to government bonds at a disadvantage, as well as those with significant exposure to unlisted assets.

Fellow asset owner body, the Association of European Paritarian Institutions (AEIP), also called on the Commission to create a labelling system to replace Articles 8 and 9.

But Norway’s biggest pension fund, KLP, argued in its consultation response that identifying what labels would be suitable “seems too hard” and could become confusing for beneficiaries and retail investors while failing to be useful to qualified investors.

It suggested instead that the EU could revive its plans for an ‘Ecolabel’ for green retail investment products. Those plans were quietly shelved after the Commission failed to established consensus on investment thresholds for eligible funds.

Meanwhile, Germany’s fund industry body, BVI, urged the Commission not to completely reinvent SFDR.

It said “the aim should be to establish a new categorisation system while drawing from the market experience with the current SFDR framework, not starting from the scratch”.

BVI also warned that “it would be very difficult to convert Articles 8 and 9 into product categories” that would fit with the Commission’s suggestion for a labelling regime “given their design as transparency standards”.

Bespoke rules for pension funds

PensionsEurope, which represents national associations of pension funds in the region, joined a growing chorus of asset owner bodies calling for SFDR to provide specific rules for pension funds, instead of treating them the same as other players in the financial system such as asset managers.

Pensioenfederatie made the same request, saying the Commission should replace horizontal regulation with sectoral rules, perhaps via the IORPII Directive for pension funds, or permit EIOPA to create “an IORP-specific Regulatory Technical Standard” within SFDR.

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