French regulator argues for adding SRI label criteria to SFDR framework

Regulator proposes 'non-financial filters' label with SRI criteria as other national supervisors back introduction of new category system.

French financial regulator AMF has proposed introducing a fund category based on the criteria for the country’s SRI label in its response to the European Commission’s consultation on the future of SFDR.

The consultation, which closed at the end of last year, polled the market on a broad range of topics, including product disclosures, to what extent the regulation had achieved its goals and reforms to the Article 8 and 9 categories. A full set of responses has now been released by the Commission.

In its response, the AMF suggested product categories covering environmental solutions, social solutions, climate transition and “non-financial filters”.

It also said it opposed the introduction of a label broadly covering funds which are “aiming to meet credible sustainability standards or adhering to a specific sustainability-related theme”, corresponding to the Sustainability Focus label in the UK’s incoming Sustainability Disclosure Requirements.

While the first three categories proposed by the AMF would build on existing EU regulation, such as the taxonomy, the fourth mirrors the French SRI label, which takes a “best-in-class” approach.

Under the SRI label, “E, S and G” should each represent a minimum 20 percent of the fund’s weighting and a 30 percent reduction in the fund’s investable universe, compared to its initial investment universe.

This “generalist” approach, however, has been criticised by French investors, throughout the label criteria’s two-year revision, which concluded in December.

Mirova’s head of sustainability research, Mathilde Dufour, described the SRI label’s minimum-weighting approach as “outdated”, arguing instead for alignment with the SFDR’s sustainable investment definition.

A spokesperson for the AMF told Responsible Investor that they felt this common market practice – the best-in-class approach – could serve as a basis for objective minimum criteria for the non-financial filters category, given the lack of alternatives currently available.

The SFDR framework should be compatible with existing national labelling schemes, they added.

For its proposed categorisation system, the AMF said SFDR should set “common, minimum expectations”, which leave “no room for interpretation” and where the market would be free to develop “more ambitious” strategies and practices.

It added that SFDR has suffered from the lack of clarity of the concepts it relies on, such as “sustainable investments”, “environmental/social characteristics” or the consideration of Principal Adverse Impacts.

Supervisors in focus

The AMF was one of eight regulators and supervisors to submit a public response to the consultation, along with the Danish FSA, Irish central bank and Finland’s Ministry of Finance.

As with responses from financial market participants, there were a variety of views on how the SFDR framework should be designed going forward.

Asked whether there should be uniform sustainability disclosures for all financial products in the EU, the Swedish consumer watchdog, Finnish finance ministry and Central Bank of Ireland were the least supportive.

The Danish and Austrian financial regulators backed the proposal, as did the German environment agency and the AMF.

France’s accounting standards authority, ANC, was less enthusiastic than its fellow French regulator, rating the proposal 3 out of 5 where the AMF gave it a 5.

There was greater consensus when it came to the establishment of a category system. The Finnish finance ministry was the only supervisor leaning towards retaining the Article 8/9 system. Denmark’s FSA declined to state a preference, stating that “both approaches could work”.

Many of the regulators noted the importance of balancing the cost and effort sunk into setting up systems under the current framework against the need to design a workable framework.

For instance, Austrian regulator FMA warned that changes would involve “substantial costs”. At the same time, it said, this should not prevent the improvement of sustainable finance regulation “for the better in the long term”.

However, the Finnish response said that building on current market practice would be the easiest solution for the same reason. “The establishment of category system should not cause unnecessary market turmoil,” it said.

The Danish FSA noted that keeping an Article 8/9 system would create more regulatory stability. If a new system were devised, it said Articles 8 and 9 should be “dismissed completely” to ensure clarity.

The Irish central bank acknowledged the potential for converting Article 9 into a label but backed the development of new categories due to the “very broad range of products” under the current Article 8 classification.