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EC Leaning Toward New SFDR Categories

DG FISMA acknowledges complexity ahead of new policy proposals, while Eurosif calls for commission to “embrace” the way the regulation has been used to date.

The European Commission’s DG FISMA has emphasised the merits of replacing the Sustainable Finance Disclosure Regulation’s (SFDR) existing Article 8 and Article 9 labels with formal categories based on “clearer criteria”.

Investors have been in limbo for six months about the future of the regulation, which provides guidelines on the disclosures required of green investment vehicles.

In May, the commission declined to provide a definitive steer following a consultation on either implementing new criteria more closely aligned with the UK’s Sustainability Disclosure Requirements (SDR) fund labels or formalising Article 8 and 9 as product categories.

More than half of respondents indicated a preference for moving away from the Article 8 and 9 classifications, while 72% backed a specific fund category for transition-focused products.

The European Supervisory Authority (ESA) proposed creating two fund categories, one for sustainable funds and another for transition funds, while the European Sustainable Investment Forum (Eurosif) suggested introducing three categories.

“It is clear for everyone today that the current Article 8 and Article 9 are not fit to be used as categories, and they were not meant to be used as such,” said Mathilde Loussert, Policy Officer at DG FISMA, speaking at a webinar hosted by European law firm Frank Bold.

“It is also clear that beyond Article 8 and Article 9, existing sustainability concepts are sometimes not clear enough and sometimes too complex. Therefore, replacing this current framework with actual categories with clear criteria is a possibility.”

She said work at a technical level by DG FISMA is currently ongoing to develop policy proposals to present to the new commission, which took office on 2 December and is headed by Ursula von der Leyen.

Loussert added that this work is based on three inputs: the responses to the public consultation on SFDR, the ESAs’ opinion on the SFDR review published in June, and the ongoing work of the Platform on Sustainable Finance, which is due to publish an SFDR-focused report this week. 

DG FISMA is the commission’s directorate-general responsible for financial stability, financial services and the Capital Markets Union, covering the development and execution of policies on regulation and supervision, insurance and pension funds, and sustainable finance, including SFDR.

Proxy categorisation system

Introduced in 2021, SFDR was initially intended as a transparency regime imposing disclosure requirements for fund managers. Over time it has become increasingly used as a de facto classification regime, with Article 8 funds widely regarded as ‘light green’ and Article 9 as ‘dark green’.

Speaking at the Frank Bold-hosted webinar, Pierre Garrault, Senior Policy Adviser at Eurosif, said that the revised SFDR should “embrace the way it has been applied in markets”.

He suggested this would mean turning SFDR into a proxy categorisation system, but backed by clear criteria and defining categories for products based on their sustainability objectives, as well as ensuring that performance against those objectives is measured by specific KPIs.

Rules introduced by the European Securities and Markets Authority (ESMA) last month are expected to serve as an interim anti-greenwashing measure ahead the more expansive update to the SFDR.

Applying to new funds from 21 November and from May 2025 for existing funds, ESMA’s fund name guidelines will ensure funds invest at least 80% of their assets in line with sustainability-related terms in their name – such as ‘ESG’ or ‘transition’ – similar to the UK SDR’s fund naming and marketing rules.

ESMA is expected to publish further SFDR guidance and a Q&A document next year.

Loussert said that new categories would need to “allow for some level of international operability”, both with the UK’s SDR but also on a national level for public and private labels in European member states.

The respondents to last year’s EC consultation on SFDR called for the European approach to allow for international interoperability as much as possible.

Loussert nevertheless stressed that DG FISMA wants the changes to SFDR to be an “evolution rather than a revolution”. “The idea here is to fix what didn’t work, but not to completely change everything and erase the good work that had been done by the industry and by investors in the past year,” she said.

“It’s very much trying to build on the existing framework and good market practices to see how we can make SFDR more simple, clearer and more effective.”

Frank Bold’s analysis of sustainability disclosures under SFDR by 15 investors and 43 of their investment funds reported a “lack of clarity” between Article 8 and Article 9 funds.

A separate report from think tank InfluenceMap assessing the European climate-related and ESG fund market in the context of the incoming ESMA fund naming guidelines and existing SFDR, found a “notable disparity” between funds using ESG or climate-related naming and those disclosing under SFDR.

While Article 9 disclosure is aimed at funds with the objective of sustainable investment, only 29% of the 673 funds identified as using the term ‘sustainable’ in their name are in fact disclosing using SFDR Article 9.

InfluenceMap also reported that Article 8 funds had cumulatively invested €43.8 billion (US$46 billion) in fossil fuel companies compared to €39.4 billion in green companies, compared to Article 9 funds which invested 20 more in green companies than fossil fuel firms.

The post EC Leaning Toward New SFDR Categories appeared first on ESG Investor.

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