EU regulators are planning to pare back new disclosure requirements aimed at curbing greenwash by reducing the number of ESG indicators service providers must report against, RI has learnt.
Current proposals for the Sustainable Finance Disclosure Regulation (SFDR) have been deemed unworkable due to a lack of available data and implementation costs.
Once adopted, the rules will require asset managers and other financial groups to disclose the ways in which their ESG-branded investment products could potentially harm climate and broader sustainability goals based on a list of mandatory reporting indicators.
The EU’s three financial market regulators, the EBA, ESMA and EIOPA, have been tasked with developing the regulation’s details. The original plans included 32 indicators that investors and others must report against; but these are now expected to be slashed to around 15. The majority of the revised indicators, 11 in total, will centre on the environment, while the remaining four will cover social factors, RI understands.
To compensate for the looser rules, regulators are expected to introduce new social safeguards by requiring sustainable investment products to adhere to international guidelines such as the OECD Guidance for Responsible Business Conduct and the International Labour Organisation’s conventions on workers’ rights.
There will be an additional 16 environmental and 24 social indicators for voluntary disclosure, and providers will be expected to disclose against at least one in each category based on their materiality.
Details of the rules, which were due to come into force in March, have been delayed to 2022 due to the ongoing pandemic and to give service providers more time for compliance.
The delay has piled pressure on the European Commission – which oversees the three financial regulators – to endorse a revised proposal, which is palatable to the wider market to prevent it from being vetoed by the Council or the Parliament. Under a more urgent timeline, a veto from the EU co-legislators is thought to be less likely due to the significant amount of political capital which has been staked on delivering the EU’s sustainable finance agenda.
In September, RI reported on the growing backlash against the EU’s original proposals after they were branded unfeasible and costly by industry groups – including a number of responsible investment bodies. Feedback to the regulators suggested that credible data sources for many of the indicators were not readily available and that the resulting disclosures would be of little use to investor decision-making.
The turnaround by regulators comes after a period of sustained lobbying by industry groups to ease the forthcoming reporting requirements, and will be seen in some quarters as a concession to corporate interests. Campaign groups ShareAction and Global Witness have argued that granular reporting requirements are in line with the EU's sustainable finance agenda and key to stamping out investments linked to human rights abuses, land grabs and large-scale environmental destruction.
Industry lobbyists are already seen as having secured a key victory with the year-long delay to implementation of the rules. Earlier, industry groups had warned regulators that sticking to the original March start date could jeopardise the ability of providers to offer sustainable financial products to their clients.
Commenting on the revelations, Paul Tang, the European Parliament member overseeing the proposals said that he was confident that the regulator’s final proposals would “sufficiently cover all elements of sustainability”.
“During the negotiations of the text, the European Parliament has made very clear that it looks at sustainability as a broad concept, covering environmental, social and governance aspects. Not only polluting companies are unsustainable, but also those mistreating their employees or those avoiding their fair share of taxes,” he said.
Despite the delay to detailed reporting rules, service providers in the EU will nonetheless be required to make ‘principle-based’ sustainability disclosures from March onward at both product and corporate level.