Norway’s largest pensions provider has said that, while the market needs a categorisation system for sustainability-focused funds, the EU’s Sustainable Finance Disclosure Regulation is not the right home for it.
The comments came in KLP’s response to a consultation by the European Commission on the future of the SFDR, shared with Responsible Investor.
The consultation, which covers topics including changes to disclosure requirements and whether the purpose of the regulation itself is still relevant, had been due to close on Friday but was extended by a week to give respondents more time to answer.
RI reported last week on the first tranche of public responses, which showed a lack of consensus on what form a fund-labelling system should take, but mostly aligned around calls for universal sustainability disclosures for funds.
Overall, market participants have been divided on whether the best approach was a new category system or reforming Articles 8 and 9 into formal labels. KLP went a step further, suggesting that product classifications should not come under SFDR.
“Using the EU Ecolabel or similar might be more [suitable],” the €63 billion pension fund said in its response. It advised keeping SFDR as “a disclosure regiment only” and creating “an easy-to-understand and usable classification scheme under the EU umbrella”.
Asked for its opinion on the proposed four-label system, which broadly mirrors that coming into force in the UK, KLP said there were so many possible categories “that trying to define them seems too hard”. The risk of the labelling regime, it continued, is that it will be too confusing for retail investors and not offer much additional information to professionals.
Turning to disclosures, KLP expressed mixed feelings on entity-level reporting. While agreeing that PAI-related goals and how firms are working to reduce negative impacts has value, the pension fund said that reporting aggregate level PAI figures “makes no sense for anyone to look at”.
On the product level, KLP said it appreciates the extended transparency of SFDR but that reporting is “too exhaustive” and reporting templates are subjective enough to make comparability difficult. Reporting could be simplified by making the annexes clearer and less extensive and using the same reporting template for various uses, it suggested.
Industry bodies weigh in
UKSIF and the IIGCC have also delivered their verdicts on the future of SFDR.
Unsurprisingly, UKSIF called for close alignment with the UK regime on fund-labelling, and recommended good practices in the Financial Conduct Authority’s approach such as extensive consumer testing and a dedicated category for mixed funds.
This was echoed by the IIGCC, which backed the Commission’s proposed categories for transition, impact and focus labels, but expressed reservations about the exclusions category. It also called for a mixed fund label and said it was “imperative” that policymakers mitigate the risk of regulatory fragmentation with other jurisdictions.
In addition, the IIGCC backed better guidance on transition investments, noting that current guidance from the Commission could limit the ability of investors to hold transition assets. It called for robust criteria for assessing transition progress, such as progress against transition plans set out in the European Sustainability Reporting Standards or against the indicators in the Climate Action 100+ benchmark.
On the reporting side, UKSIF echoed calls by other market participants for greater alignment on entity-level reporting between the SFDR and the CSRD. It recommended keeping a narrow list of indicators as mandatory, including emissions and gender pay gap reporting. Others could be made voluntary or turned into comply-or-explain indicators, it added.
Some of these newly voluntary indicators, such as negative biodiversity impacts and hazardous waste, could be made mandatory overtime as data availability improves.
UKSIF also backed introducing a minimum baseline of sustainability disclosures for all funds.
Another solution to the labelling dilemma was offered in a response put together by the University of Hamburg’s sustainable finance research group, in partnership with FIRST and Advanced Impact Research, the two groups responsible for assessments of funds under Germany’s sustainable fund label the FNG Label.
The group’s solution would see three labels put in place. Article 8 would be replaced by a broad “ESG products” category, which would include funds which are “managing assets’ ESG risks and opportunities to optimise risk-and-return profile”, while Article 9 would be split into transition and sustainability-focused products.
The transition and sustainability-focused products would have to invest a minimum of 70 percent of their assets in transition or sustainable investments – although the group noted that a specific definition of transition investments would have to be developed.
Funds could invest in a mix of sustainable and transition assets, but would take the label of the largest share.
The proposal also called for funds to report on investor contributions, distinguishing between impact-aligned assets and impact-generating assets, with the product supporting either the transition or sustainable performance of assets in the latter case.
To decide this, the proposal suggested defining investor contribution as “the contribution that the investor makes to enable enterprises (or intermediary investment managers) to achieve impact”.