The European Commission is expected to ask for feedback on new potential categories for sustainable investment products as part of a wider consultation on how to improve the Sustainable Finance Disclosure Regulation (SFDR), according to a document seen by Responsible Investor.
“The Commission is interested in understanding how the SFDR has been implemented and any potential shortcomings in its interaction with other parts of the European framework for sustainable finance, and in exploring possible options to improve the framework,” the document says.
The consultation is expected to kick off shortly, potentially later this week, several market observers told RI. The consultation is expected to run for three months, two people said.
The consultation, as expected, is looking to address the application of SFDR’s disclosure categories – Article 8 and Article 9 – as de facto investment labels, which was not what the regulation’s architects intended.
“We therefore seek views about the merit of developing a more precise EU-level product categorisation system based on precise criteria,” the draft document says.
It outlines two potential strategies for such a system: building and developing on the distinction between Article 8 and 9, and the existing concepts embedded in them, or taking a different approach such as looking at types of investment strategies.
For the latter approach, it said: “In such a scenario, concepts such as sustainability characteristics or sustainable investment and the distinction between Articles 8 and 9 of SFDR may disappear altogether from the transparency framework.”
Proposals for a new approach to categories broadly map on to those announced by the UK’s Financial Conduct Authority (FCA) in its plan for sustainability disclosures.
The new Commission document puts forward descriptions for four categories, as well as an option for respondents to propose their own category. Three of these largely correspond with the FCA labels.
The first proposed category covers products investing in assets that strive to offer targeted measurable solutions to sustainability-related problems. This maps to the FCA Impact label, which covers products investing in assets that provide solutions to environmental or social problems – although products with the FCA label will also need an explicit objective to achieve a contribution to sustainable outcomes.
The second proposed category covers products aiming to meet credible sustainability standards or a specific sustainability theme, which is almost identical to the description of the FCA Focus label.
Funds in the third category will aim to “bring measurable improvements to the sustainability profile of the assets they invest in”, which is again almost identical to the FCA’s Improvers fund definition, with the only major difference being an explicit reference to stewardship outcomes in the FCA description.
The biggest difference between the FCA proposals and those put forward in the EU is the fourth category, which covers funds that exclude activities with negative environmental or social effects. The FCA had proposed a similar “responsible” label for funds which consider the impact of material sustainability factors in its first consultation on the labelling regime but dropped it in the second round of proposals after investor feedback.
The draft EC document also seeks views on potential changes to disclosure requirements under SFDR.
It asks whether entity-level disclosure requirements for financial market participants are useful, if the SFDR is the right place to include entity-level disclosures, and to what extent there is room for streamlining sustainability-related entity level requirements “across different pieces of legislation”.
On product disclosures, it asks whether the EU should impose uniform disclosure requirements for all financial products offered in the bloc, regardless of their sustainability-related claims or any other consideration.
“The general principle of the SFDR is that products that make sustainability claims need to disclose information to back up those claims,” the document says. It adds that this could be seen “as adding more burden on products that consider sustainability”.
“This is why […] we ask respondents about the usefulness of uniform disclosure requirements for products across the board,” it says. “This could make it easier for some investors to understand products’ sustainability performance, as they would get information also about products that are not designed to achieve any sustainability-related outcome.”
The draft questionnaire also requests feedback on some of the current requirements of SFDR and how it interacts with other relevant regulation.
Some existential questions are put to stakeholders in the document. These include, “Is the broad objective of the regulation still relevant?”, as well as a section asking respondents to assess how effective the SFDR framework is in achieving its different specific objectives.
Respondents are also expected to be asked about costs associated with complying with the SFDR requirements and how many full-time employees work “to elaborate” SFDR disclosures.
The European Commission declined to comment.