Finance associations call for merging of SFDR reviews

Separately, PwC study finds only one in five management companies in scope issued a public PAI statement last year.

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Several financial industry associations have jointly expressed concern over the lack of coordination of ongoing efforts to improve the EU’s Sustainable Financial Disclosure Regulation (SFDR), calling for them to be combined and for a “period of stability”.

The joint letter to the European Commission’s Directorate-General for Financial Services was sent by seven associations, including Financial Markets in Europe (AFME) and the European Fund and Asset Management Association (EFAMA). It comes just one month after the European Commission’s consultation on wholesale SFDR reforms closed.

The industry groups highlighted concerns about a lack of coordination between efforts to alter the SFDR regulation (known as Level 1) and the plan to implement technical changes (Level 2) – for example, by introducing new Principal Adverse Impact (PAI) indicators and a do no significant harm (DNSH) “safe harbour”.

They argued that failure to consider these changes holistically would pose a risk to investors’ confidence in sustainable investment solutions and the reliability of the EU standards for sustainable disclosures.

The Level 1 review is run by the commission, while the European Supervisory Authorities (ESAs) are behind the technical proposals under the Level 2 review.

The ESAs published their final report on proposed tweaks in December and the commission has three months to review the draft standards and decide whether to endorse them –although there have been indications that the approval could be delayed. The commission has been approached for comment.

The industry groups said it is critical that the Level 1 and Level 2 reviews of the SFDR are “merged” to guarantee legal certainty, deliver a successful law-making process, and prevent duplication.

They also “strongly supported” the commission delaying the adoption of the Level 2 measures, describing any further requirements or amendments as “premature” at this stage.

“The assessment of whether changes and new disclosures should be introduced … should be done together with the holistic review of the framework and after major changes to the Level 1 concepts.”

The industry should be granted appropriate grandfathering measures, the associations added, and a minimum of one year for implementation once the revised Level 2 texts are published in the Official Journal of the EU.

In December, the ESAs said that some respondents to the consultation had raised concerns about the timing of the Level 2 reforms, given the ongoing Level 1 review.

But the supervisory authorities said there was an expected time lag of several years between the review and any Level 1 changes being made to SFDR and that they “do not believe it is a viable option to do nothing, as some respondents suggested”.

PAI statements

Separately, in a PwC analysis of more than 2,000 management companies – which oversee the operations and investments of a fund – just over one in five issued a public PAI statement.

A similar number of managers of UCITS or AIF funds followed the template prescribed by SFDR’s Level 2 standards.

From last year, firms that fall under SFDR have been required to publish a statement detailing the impact of their investment decisions on a series of sustainability factors.

Responsible Investor addressed several of the challenges firms faced in the first round of disclosures in a series of articles last summer, where reporting firms flagged variance in data coverage across indicators, and questioned the value of entity-level statements.

RI also revealed that the majority of investors did not go beyond the minimum requirements on voluntary PAI indicators in their reports.

The PwC study – which covered nine European countries – found that more than 20 percent of firms failed to publish any PAI statement, or provide a reason as to why they would not report on PAIs at entity level.

For those that met the deadline, most of the disclosures were incomplete, lacked qualitative and qualitative insights, or in some instances were left completely blank.

Insufficient and unsatisfactory non-financial data was cited as a barrier by two in five firms.