Financial Services & Asset Management: The European Commission consults on SFDR


People in different floors

Newsflash: On 14 September 2023, the European Commission (the EC) published two consultation papers to seek feedback on the fundamental features and effectiveness of the Sustainable Finance Disclosure Regulation (SFDR)1. The SFDR, which entered into force in March 2021 in the EU and January 2023 in Norway2, sets out how financial market participants, such as asset managers, have to disclose sustainability information to investors and other stakeholders. The purpose of the SFDR is to bring more transparency to the market and enable investors to make informed decisions.

The targeted consultation paper3 aims at gathering information from a wide range of stakeholders, as well as professional and retail investors, on their experiences with the implementation of the SFDR. In the paper, the EC asks for feedback on several topics, including:

  1. Product categorization: Whether concepts such as environmental/social characteristics or sustainable investments and the current distinction between Articles 8 and 9 should "disappear altogether from the transparency framework", and whether a more precise EU-level product categorization system based on precise criteria should be developed.
  2. Product level disclosures: The EC requests feedback on whether the EU should impose uniform disclosure requirements for all financial products offered in EU, regardless of related sustainability claims. Such uniform rules would involve departing from the general philosophy of the SFDR as regards product disclosures (i.e. that only products that make sustainability claims need to disclose information to back up those claims and combat greenwashing).
  3. Disclosures on principal adverse impacts (PAIs): The consultation paper lists several questions related to the usefulness and appropriateness of the PAIs. For instance, the EU asks whether it is clear how the PAI disclosure requirements interacts with the requirements under Articles 8 and 9, and whether the PAI disclosure requirements creates any methodological challenges.
  4. Website disclosures: Current website disclosures make it mandatory for product sustainability information to be publicly available. The EC requests stakeholders' views on the usefulness of public disclosures and whether confidentiality aspects need to be taken into account. The EC also asks whether the SFDR should not impose rules where sustainability information should already be made available in accordance with rules in sector legislation, such as UCITS and AIFM directives.

The public consultation paper also seeks broader feedback on the SFDR.

General remarks

SFDR has since before implementation been the cause of several questions from various market participants and investors. The rules are technical in nature and several topics remains unanswered. One of the main topics for discussion is whether the classification system is appropriate and in particular whether it is used as intended. Furthermore, unclear disclosure obligations and limited regulatory guidance have created a lack of uniform interpretation and varying approaches to the reporting regime laid out in the SFDR.

In particular, the market has witnessed market participants who use the classification system as a marketing label used to attract investors. This again has caused certain financial regulators to react, as it may possibly contribute to an increased risk of greenwashing thereby undermining the objectives of the SFDR.

The consultation round could indicate that the framework was implemented before it was properly matured, and in too much of a rush especially seen together with the EU Taxonomy regulation. It will be interesting to see the feedback from various stakeholders in the consultation round, and whether the SFDR will merely be adjusted or subject to material changes in the years to come.

Interested stakeholders have until 15 December 2023 to respond on both consultations. If you have any questions relating to this briefing or need any assistance with responding to these consultation papers, please do not hesitate to reach out to our Financial Services team.

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