The European Commission has launched a consultation on the future of the EU’s sustainable finance disclosures regulation (SFDR), floating the possibility of “the distinction between the current Articles 8 and 9” disappearing from the transparency framework as part of a move to a sustainability product categorisation scheme.
In its targeted consultation launched yesterday, the Commission also asked questions about the SFDR’s interaction with other sustainable finance legislation such as the Corporate Sustainability Reporting Directive (CSRD), and potential changes to the existing disclosure requirements.
For example, the consultation document noted that financial market participants will rely to a significant extent on the CSRD and the accompanying standards to fulfil their disclosure duties under the SFDR, with the Commission asking if there is room to “streamline the entity-level disclosure requirements of the SFDR and the CSRD”.
Questions are also asked about the approach to principal adverse impact (PAI) indicators and the cost of disclosures under the SFDR today.
Categorisation system ideas
According to the consultation document, the Commission is exploring the merits of a categorisation system because of the fact that Articles 8 and 9 are being used as de facto labels, raising concerns that this is leading to greenwashing risks. Earlier this year the French regulator proposed minimum criteria for Articles 8 and 9 to address this issue.
The Commission is now seeking feedback on two broad strategies for developing a proper categorisation system.
One would involve converting Articles 8 and 9 into formal product categories and developing the existing concepts embedded in them, such as sustainable investment or do no significant harm.
The other approach would be quite different, for example focussing on the type of investment strategy, based on criteria that do not necessarily relate to the existing SFDR concepts.
“In such a scenario, concepts such as environmental/social characteristics or sustainable investment and the distinction between current Articles 8 and 9 of SFDR may disappear altogether from the transparency framework,” the Commission wrote in its document.
“I caution against a complete overhaul of the framework given that the financial industry has made a substantial effort and spent lots of time and energy implementing the rules”
Aleksandra Palinska, executive director at Eurosif
In floating the possibility of establishing a product categorisation system, in particular one departing from the Articles 8 and 9 distinction, the Commission appears open to move in a similar direction as the Financial Conduct Authority in the UK. The regulator is expected this quarter to set out its response to a consultation on plans to introduce labels for ESG and sustainability-related investments.
At Eurosif, executive director Aleksandra Palinska said the SFDR framework certainly needed some adjustments, including regarding so-called “sustainable investments”, but that she would “caution against a complete overhaul of the framework given that the financial industry has made a substantial effort and spent lots of time and energy implementing the rules”.
“Let’s fix what needs fixing, but let’s not throw the baby out with the bath water and rather build on what has been already achieved. One of the aspects that needs addressing is impact investments/transition finance, the specifics of which are neither addressed by the Article 9 nor Article 8 categories,” she told IPE.