The regulation includes classification levels for sustainability-focused investment funds, each with varying disclosure requirements, including ‘Article 8’ funds that “promote environmental or social characteristics or a combination of those characteristics,” and the more stringent ‘Article 9’ funds, “which have sustainable investment as their objective.”
One of the regulation’s key requirements, and among the most challenging for asset managers, is for reporting on Principal Adverse Impact (PAI) that investment decisions have on a broad range of sustainability factors, such as climate and environment, as well as social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.
While the consultation explains that the SFDR was designed to require products that make sustainability claims “to disclose information to back up those claims and combat greenwashing,” it notes that these requirements “could be viewed as placing additional burden on products that factor in sustainability considerations,” and asks respondents to consider if all products “regardless of related sustainability claims,” should have uniform disclosure requirements.
The consultation adds that this move could also have the benefit of allowing investors to understand products’ sustainability performance even for products that don’t make sustainability claims.
The consultation continues to ask what disclosure requirements should be considered for all financial products, listing taxonomy-related disclosures, engagement strategies, exclusions, and information about how ESG-related information is used in the investment process.
In addition to the potential disclosure requirement changes, and questions about the current functioning of the SFDR regulations, the EU Commission’s consultation also included questions on developing more “precise EU-level product categorisation system based on precise criteria” for sustainable financial products beyond its current “Article 8 and 9” categories.
Following the launch of the consultation, Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said:
“Sustainability information is key to empowering investors to make informed decisions on their investments. Since the Sustainable Finance Disclosures Regulation (SFDR) was proposed in 2018, a lot has changed in the world of sustainable finance. Today we are launching an in-depth three-month consultation for stakeholders. We want to know if our rules meet their needs and expectations, and if it is fit for purpose.”