‘A lot of questions were not answered’: Market reacts to long-awaited EU response on sustainable finance disclosures

The European Commission's responses to a range of queries from the European Supervisory Authorities (ESAs) on the EU’s sustainable finance disclosure regime have done little to reduce confusion, industry sources say. 

The nine-page Sustainable Finance Disclosure Regulation (SFDR) Q&A document is the long-awaited response to a letter sent by the ESAs in January, asking the Commission to clarify the finer points of the new rules. For example, the supervisors sought a clearer definition of Article 8 products – those described as promoting environmental or social characteristics – and Article 9 products, which pursue such objectives. Product categorisation has proved confusing for market participants so far, with different interpretations of the definitions, but it is a fundamental part of the SFDR’s aim of enhancing transparency and tackling greenwashing.

Europe’s responsible investment association, Eurosif, said on LinkedIn that while it welcomed clarifications around the SFDR’s scope and application in the Q&A, uncertainty remained around “arguably the more urgent issue” of product classification. 

One financial regulation lawyer, who asked not to be named, agreed, saying “a lot of questions were not answered at all or in one sentence”. Another industry source said “the Q&A will help very little and is not very informative”. 

With regards to the definition of ‘Article 8’ products, the ESAs wanted the Commission to clarify the meaning of “promoting” in the context of products promoting environmental and social characteristics. 

There is growing frustration in some parts of the market over the number of asset managers that are classifying funds as ‘sustainable’ under Article 8 based on limited exclusion policies.

In addition, there are concerns that SFDR implementation will be fragmented, with some national regulators issuing minimum domestic standards for ESG funds that would likely also look to be classified as Article 8 products.

The Q&A document answered the question by referring to the existing rules, which say there are a range of ways for a product to promote environmental and social characteristics. Thus, it says, “nothing prevents financial products from applying various tools and strategies” such as screening, exclusion strategies and thematic investing. It said it remains neutral on how products are designed and does not provide minimum investment thresholds for Article 8 products. 

The Commission does clarify that products must state in their pre-contractual disclosures that the promotion of environmental and/or social characteristics will be binding during the entire holding period. 

More clarity on Article 8 products has, however, been promised. In the Renewed Sustainable Finance Strategy, published earlier this month, the Commission said it will propose minimum sustainability requirements for Article 8 products. An EC spokesperson also told RI in May that it is preparing “several Q&As” on the SFDR, so more guidance could be forthcoming.  

With regards to Article 9 products, the ESAs asked the Commission whether funds must be fully invested in “sustainable investments” as defined under the SFDR regulation, or whether there is a minimum level of sustainable investments required to classify as Article 9 – or a maximum share of “other” investments. 

The Commission again stopped short of providing a threshold for sustainable investments or further details on how an Article 9 product should be designed. But it said Article 9 products are allowed to make other investments alongside sustainable investments, for example for hedging or liquidity purposes. 

The ESAs also asked the Commission whether, in order for a decarbonisation-focused fund to qualify under Article 9, it must track an EU Paris-aligned Benchmark (PAB) or a Climate Transition Benchmark (CTB), where such benchmarks exist. The Commission clarified in the Q&A document that “where an EU Climate Transition Benchmark or EU Paris‐aligned Benchmark exists, a financial product must be tracking these”. It is unclear what this would mean in practice – for example, in relation to active asset managers with no passive products.

More broadly, the Q&A also re-emphasised that Article 8 and Article 9 are “two distinct product categories” that are key for investors to determine whether financial products are ambitious enough to meet their sustainability preferences. 

This follows comments by Nathan Fabian, Chief Responsible Investment Officer for the Principles for Responsible Investment and head of the EU’s advisory Platform on Sustainable Finance, saying “I actually see Article 8 and 9 as being on a bit of a continuum, they’re not distinctly different” during a webinar held earlier this month. “And to everyone who is thinking about this, they’re not labelling categories either […] That’s not how they were set up and it’s not going to be a very useful way to try to categorise financial products.”