The European Supervisory Authority’s (ESAs) suggestions for developing on Europe’s sustainable finance reporting framework could bring it “a bit closer to the Sustainability Disclosure Requirements (SDR) in the UK”, according to industry experts.
Last week, the three ESAs published a joint opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR), calling for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection, and taking into account the lessons learned from the functioning of the regulation.
The ESAs focused on ways to introduce simple and clear categories for financial products, consisting of two voluntary product categories: ‘sustainable’ and ‘transition‘. Financial market participants, they argued, could use these two categories to ensure consumers understand the purpose of the products, with the rules for the categories having clear objectives and criteria to reduce greenwashing risks.
In a wide-ranging list of recommendations, the ESAs also suggested that the European Commission consider the introduction of a sustainability indicator that would grade financial products such as investment funds, life insurance and pension products.
Additionally, the ESAs also covered appropriate disclosures for products outside the two categories to reduce greenwashing; improvements to the definition of sustainable investments; simplification to the way disclosures are presented to investors; other technical suggestions, including on which products should fall under the scope of SFDR and on how to improve disclosures regarding the negative impact of investments on people and the environment; and the need for conduct consumer testing before putting forward any policy proposals to review the SFDR, such as to introduce a categorisation system and/or an indicator.
The feedback after the Commission’s consultation paper last year on SFDR was that the regulators “were all in favour of making it a genuine classification regime”, noted Mikkel Bates, regulatory manager at FE Fundinfo.
“The good news is that this would bring the SFDR a bit closer to the SDR in the UK, with at least labels similar to ‘Focus’ and ‘Improvers’, as well as naming and marketing restrictions. However, unlike the UK, the ESAs’ proposals would still retain the concept of a grading from ‘light green’ to ‘dark green’,” Bates explained.
“Fund groups could be required to undertake another update to their prospectuses, not only with new disclosures, but possibly new wording for their funds, either to align them with the labels they wish to adopt or to include or omit certain terms to comply with naming restrictions.”
While it is likely that the European Commission will pay close attention to the ESAs’ proposals in their deliberations, Bates cautioned it may be a while before a new Commission is up and running post-election cycle. In addition, changes to the SFDR regulation itself would require it to go through the European Parliament and Council again for approval, further delaying the process.
