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EU to suggest minimum sustainability requirements to harmonise SFDR reporting, and is considering ‘transition label’ framework

Documents seen by RI reveal that a consultation will also launch on the functioning of the ESG ratings market, alongside wide-ranging plans for the broader financial sector

The European Commission will propose minimum sustainability requirements for products falling in the ‘light green’ category of the Sustainable Finance Disclosure Regulation (SFDR) in a bid for harmonised implementation of the reporting rules, RI understands. 

The Commission outlines the plans in draft documents seen by RI that are expected to be published next week as part of the EU’s Renewed Sustainable Finance Strategy, the sequel to its 2018 sustainable finance Action Plan. 

It says it wants to guarantee minimum sustainability performance of products disclosing under Article 8 of the SFDR – those that promote environmental or social characteristics – and also help “further strengthen a harmonised application of the regulation”. The documents do not, however, mention plans for minimum requirements for Article 9 products, those that pursue environmental and social objectives. 

The Commission does, however, seek to address the hurdles around Principal Adverse Impact (PAI) reporting under the SFDR rules, and says that before December next year it will engage with the European Supervisory Authorities (ESAs) to clarify a range of PAI indicators.   

The SFDR categories have caused major confusion in the market. RI reported recently on concerns that national regulator efforts across Europe to introduce requirements for funds marketing themselves as ESG or sustainable are causing concerns about a fragmented approach to SFDR disclosure across member states. 

In this context, there have been calls for EU-wide fund labels in addition to the planned Ecolabel for financial products, which is perceived as too narrow and very ambitious by many. 

The Commission documents reveal plans for such labels are underway. In cooperation with the ESAs and the Platform on Sustainable Finance policy advisory group it will work on further bond labels “such as transitional or sustainability-linked bonds” by 2022 and assess the needs of a “general framework for labels for financial instruments financing the transition” by 2023. 

In addition, the Commission weighs in on the reliability and comparability of the ESG ratings market. It says that in the course of this year and next, it “will assess certain aspects of ESG research to decide on whether an intervention is necessary”. By Q4 this year at the latest, it will organise a public consultation on the functioning of the market for ESG ratings, it says. In the following quarter it could, subject to an impact assessment, publish “an initiative” to strengthen the reliability and comparability of ESG ratings. 

The documents also confirm plans to adopt a complementary delegated act for business activities not covered in the first Climate Taxonomy Delegated Act published in April. These include for example agriculture and gas. 

Meanwhile, the strategy document outlines planned ESG and climate-related measures for a number of financial actors including banks and insurers, including amendments to integrate sustainability risks in existing regulatory frameworks when they are reviewed. 

For example, the document says banks will be required to conduct internal climate risk stress tests and the EBA will be mandated to issue guidelines on this. 

The Commission will also propose amendments in the upcoming review of the Solvency II Directive “to consistently integrate sustainability risks in the prudential framework for insurers”.

A European Commission spokesperson declined to comment, saying it would not confirm details of the strategy ahead of its adoption.