SFDR 2.0 leak reveals potential removal of Article 8/9 labels
A leaked draft of the European Commission proposals for SFDR 2.0 has revealed plans to remove Article 8 and 9 labels in favour of three product categories.
These will be i) transition investments, (ii) integration of sustainability factors, and (iii) sustainability-related objectives, according to reports.
The release of a revised version of the Sustainable Finance Disclosure Regulation (SFDR) has seen numerous delays – the consultation began in 2023 – and is on the back of criticism the current framework is struggling to meet its intended objectives and is fostering greenwashing. The updated regime is expected to be published on 19 November but it has been reported that details have been leaked and picked up by various media outlets.
In a summary of the anticipated changes, Simmons & Simmons said the Article 8/9 regime will be replaced by the three mandatory product categories outlined above, and these will be based around a common framework of minimum 70% alignment, mandatory exclusions, and a mandatory list of permitted investment types.
The current Principal Adverse Impact (PAI) regime will be removed at both management entity level and product levels, and there will also be new naming and marketing restrictions relating to the use of sustainability terminology.
Risk disclosures will remain in place and broadly unchanged, according to the reports, but portfolio managers and financial advisers will be out of scope.
“Assuming that the formal publication is aligned with this draft, then there is an earthquake on its way, for the ESG regulatory regime in Europe,” commented Simmons & Simmons.
“The news relates to a leaked draft of a forthcoming consultation. While there is no immediate need to take any action today, we expect that firms will be very keen to understand the potential impact of these proposals on their business and product range.”
See also: Europe’s sustainable finance crossroads: Will SFDR 2.0 close the transparency gap?
Speaking to Portfolio Adviser, Paul Hamalainen, director in the financial services regulatory advisory team for Forvis Mazars, said the European Commission has appeared to try and make the new framework more pragmatic and relevant by cutting out some entity-level reporting requirements.
“There was a lot of reporting there and our clients were always saying we don’t need to report on many of these things. So they will be trying to make it pragmatic and relevant to firms.
“They have very much gone down the labelling route, like SDR in the UK, but as we have learned from that, the devil is in the detail and it’s about what is actually underneath that.
“It’s hard to comment right now but there is definitely going to be a lot of work involved in moving to this. For example, if an Article 9 fund becomes the equivalent to an Article 8 fund because of the new requirements, will that be viewed by the market as a negative? Given the article numbers tend to have shades of greenness associated with them, it’s interesting it appears the leak says it’s tried to model the labelling to the article numbers.
“On SDR, the FCA was very clear there is no hierarchy between the focus, improvers and impact labels. But is the European Commission still trying to create a bit of a hierarchy? These are my initials observations.”
This article first appeared on Portfolio Adviser