Industry Split on SFDR Review Outcome
Consultation results reveal investors and industry networks undecided on whether to leave Articles 8 and 9 behind.
The European Commission has published a summary report outlining feedback to its consultation on the future of its flagship sustainable finance disclosure regime, having found no clear consensus on how to improve the framework.
The Sustainable Finance Disclosure Regulation (SFDR) first came into effect in March 2021, introducing disclosure requirements for fund managers to report at the entity- and product-level on how and to what extent their funds align with Article 8 and 9 fund categories.
In the three years since, compliance with SFDR has been fraught with challenges, prompting the commission to run a three-month consultation last year proposing changes to existing disclosure requirements and questioning whether the regulation was still relevant.
With the results now visible, it appears that while most respondents agreed that SFDR’s purpose remains valid, they question its current effectiveness, with 62% noting that SFDR has not sufficiently strengthened protection for end investors and 52% claiming it has not successfully directed capital towards sustainable and transition investments. In addition, 84% of respondents said SFDR disclosures were not useful to investors.
Meanwhile, seventy-seven percent of respondents highlighted additional limitations within the framework, such as a lack of legal clarity on key concepts, limited relevance of certain disclosure requirements, and ongoing issues with data availability.
A large majority of respondents called for disclosure requirements such as adverse sustainability impacts to be simplified and streamlined across the EU’s sustainable finance framework.
“Support for SFDR remains strong, demonstrating its positive effect on improving the transparency of sustainable investments,” Pierre Garrault, Senior Policy Adviser at pan-European sustainable investment organisation Eurosif, told ESG Investor. “But many respondents – including Eurosif – find it insufficiently clear in defining key terms and acknowledge it is used as a de facto labelling regime.”
The commission also noted “no clear preference” for either of its two proposed approaches to a potential EU fund labelling system.
One of these options would involve designing and implementing new criteria that would more closely align with the UK’s Sustainability Disclosure Requirements (SDR), whereas the other would formalise Article 8 and 9 as product categories.
More than half of respondents, however, did indicate their preference for a new system moving away from the Article 8 and 9 classifications, while the other third wanted to keep these existing categories.
Many respondents nonetheless stressed the importance of any categories used for sustainability-labelled funds being “easily understandable” by retail investors and for underlying criteria to be “asset-neutral”.
Seventy-two percent of respondents said they would support the creation of a specific fund category for transition-focused products. Most respondents also called for the European approach to allow for international interoperability as much as possible.
Over 320 organisations and individuals responded to the SFDR review consultation in total, with 63% identifying as financial market participants, including asset managers, insurers and banks.
No right answer
Investors have long been divided over the future of SFDR’s Article 8 and 9 categories. A previous survey conducted by Morningstar Sustainalytics found that 50% of respondents wanted to see them replaced, while 39% preferred to keep them.
In its own consultation response, the European Fund and Asset Management Association (EFAMA) said that new product categories should be introduced. It suggested categorising financial products based on their sustainability intentions using “objective” criteria, such as a clear description of the product’s intentions, an explanation of the ESG strategies that will be followed, and specification of credible KPIs.
In addition, EFAMA called for the concept of transition finance to be clearly defined and integrated within SFDR to better incentivise investments that help companies move towards more sustainable business models.
French asset manager Mirova’s response to the commission’s consultation suggested the current definition of Article 8 products was too broad, and the Article 9 definition was “too narrow”. Meanwhile, the EU’s Platform on Sustainable Finance claimed that Article 8 funds were “hard to categorise”, as they encompass a wide range of strategies and sustainable investment approaches.
Last year, the Dutch Authority for Financial Markets (AFM) proposed ditching Article 8 and 9 for three new investment categories – one of which would focus on transition finance.
“The commission’s summary report does not account for the fact that the two options are not mutually exclusive or binary,” said Garrault. “In fact, many respondents [indicated their preference for some sort of] hybrid approach between the two – again with diverging views.”
Eurosif has been advocating for a hybrid approach that builds on the foundations of the current framework, but which would establish three product categories based on the ability to demonstrate their sustainability objectives.
Products with a sustainable investments objective would need to demonstrate alignment with positive environmental or social impacts, those with a transition investments strategy would have to show a measurable contribution to positive real-world change, and those with “binding environmental and/or social factors” would be required to highlight the integration of these factors in the investment process.
“The commission’s report shows that the SFDR framework needs an ambitious review to build on its achievements and ensure it is fit for purpose to further deliver on its objectives,” said Garrault. “Much will be left to the appreciation of the next European Commission and commissioner – including the timing of the SFDR review – but we expect a publication in 2025, which could lead to the first changes to the SFDR framework being applicable around 2028.”
In the short-term, Garrault recommended the commission adopt the European Supervisory Authorities’ December 2023 recommendations on amending SFDR’s Regulatory Technical Standards (RTS), which he said would “bring welcome short-term improvements to the framework.”
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