Article 8 and 9 no more? Commission proposes potential SFDR overhaul
On 14 September 2023, the European Commission (the Commission) launched a targeted consultation (the consultation) seeking feedback from financial market participants (FMPs) and other relevant stakeholders (including national competent authorities (NCAs) and investors) on the implementation of the Sustainable Finance Disclosures Regulation (SFDR) with potentially far-reaching consequences for the existing regime.
Chief among the proposals on which stakeholder views are sought is the potential introduction of a new sustainability product categorisation system.
The consultation forms part of the comprehensive assessment of SFDR announced by the Commission in December 2022, intended to examine its potential shortcomings (focusing on legal certainty, the useability of the SFDR and its role in relation to counteracting greenwashing).
Overview of the consultation
Stakeholders are invited to provide feedback to the Commission on:
- current requirements of the SFDR
- the interaction of SFDR with other sustainable finance legislation
- potential changes to the disclosure requirements
- potential establishment of a sustainability product categorisation system
Sections 1 and 2 of the consultation (also included in a public consultation simultaneously published by the Commission) cover questions relating to how well the SFDR works in practice and potential implementation issues. In sections 3 and 4, the consultation looks to the future, assessing potential approaches to addressing potential shortcomings of the regime.
Below is a high-level overview of the four sections of the consultation, highlighting key aspects of each.
Current requirements of the SFDR
This section of the consultation seeks to assess the extent to which SFDR is considered to be meeting its objectives in an effective and efficient manner and to identify potential issues arising with respect to the implementation of the concepts it establishes and the disclosures it requires. Feedback is sought on a wide range of matters, including:
- the extent to which the SFDR is achieving a range of specified objectives (e.g. increasing transparency for end investors with regard to the integration of sustainability risks/consideration of adverse sustainability impacts and comparability of financial products)
- the extent to which respondents agree that a range of specified potential SFDR deficiencies exist (e.g. that legal requirements and concepts in the SFDR, such as ‘sustainable investment’, are not sufficiently clear) and resulting impacts (e.g. legal uncertainty, reputational risk, risk of greenwashing and mis-selling)
- the effectiveness of entity and product level disclosures around principal adverse impacts of investment decisions on sustainability factors (PAI), including the mandatory use of PAI indicators for the purposes of carrying out the ‘do no significant harm’ (DNSH) assessment required to be conducted in respect of ‘sustainable investments’
- the cost of disclosures under the SFDR
- data challenges and the use of estimates
Interaction with other sustainable finance legislation
The Commission seeks views on the interaction of the SFDR with other legislation, namely the Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), the Markets in Financial Instruments Directive (MiFID II), the Regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs) and the Benchmarks Regulation and any potential inconsistencies or misalignments that may exist between SFDR and these measures.
Potential changes to disclosure requirements for FMPs
Entity disclosures (Articles 3, 4 and 5 SFDR)
The consultation includes questions on the usefulness to investors of the SFDR’s entity-level disclosure requirements, with a particular focus on disclosure requirements pertaining to PAI. The Commission also seeks views on opportunities for streamlining sustainability-related entity-level disclosure requirements, noting that these are spread across several pieces of legislation (including the CSRD).
Product disclosures (Articles 6 to 11 SFDR)
The key question posed in relation to product level disclosures is whether the EU should impose uniform disclosure requirements for all financial products offered in the EU, regardless of their sustainability-related claims or any other consideration. Feedback is sought in this regard on whether taxonomy-related disclosures, disclosures relating to engagement strategies and exclusions, information about how ESG-related information is used in the investment process or other information would be considered appropriate for disclosure by all financial products.
The consultation then explores whether, alternatively (linking to the potential new sustainability product categorisation system described further below) only FMPs who make sustainability claims about certain products should be required to disclose additional sustainability-related information.
The consultation also gives stakeholders the opportunity to provide feedback on whether the requirement to use three disclosure points for sustainability-related information (i.e. pre-contractual documents, periodic reports and websites) is appropriate/user friendly. It also seeks views around the need to improve accessibility and usability of sustainability-related information, particularly in a digital context.
Potential establishment of a categorisation system for financial products
The consultation notes that the fact that Articles 8 and 9 of the SFDR are being used as de facto product labels, together with the proliferation of national ESG/sustainability labels, suggests that there is a market demand for such tools in order to communicate the ESG/sustainability performance of financial products.
The Commission seeks views on the advantages and disadvantages of establishing sustainability product categories and on their design. Only products that claim to fall under a given sustainability product category would be required to meet the corresponding requirements. While not committing to a preferred policy approach, the Commission explores two alternative approaches:
- Building on and developing the distinction between Articles 8 and 9 and the existing concepts embedded in them (such as environmental/social characteristics, sustainable investment and DNSH), complemented by additional (minimum) criteria that more clearly define the products falling within the scope of each article. Or,
- A new approach (pursuant to which concepts such as environmental/social characteristics or sustainable investment and the distinction between current Articles 8 and 9 may disappear) for instance, focused on the type of investment strategy (promise of positive contribution to certain sustainability objectives, transition focus, etc.), based on new criteria.
Next steps
The consultation is open for feedback until 15 December 2023.
For more information or assistance in preparing a response to the consultation, please contact any member of ALG’s ESG & Sustainability Team.
Date published: 6 December 2023