European Commission publishes consultation on SFDR – the first steps towards “SFDR 2.0”?

As speculated in the press over the last few days, the European Commission has published a consultation requesting stakeholders’ views on several key parts of the SFDR framework. Whilst the questionnaire is aimed at gathering stakeholders’ experiences with SFDR implementation at present, the questions raised are extensive and support speculation of a much more extensive review (or even overhaul) of the SFDR.

The consultation itself comprises of two papers, split into a general public consultation (addressed to a broad range of stakeholders who have a general knowledge of the SFDR) and a targeted consultation (for public bodies and stakeholders more familiar with the regime). The deadline for responses is 15 December 2023.

The targeted consultation in particular raises several questions that call into question the effectiveness and suitability of the SFDR in addressing its two key objectives of (i) providing transparency to investors; and, (2) disclosing the adverse impacts investments have on the environment and society.

The consultation paper raises the following key points:

• The Commission asks a number of questions on the general effectiveness and functioning of the SFDR and asks respondents to provide details on the costs and manpower involved with making disclosures under the SFDR as well as which elements of the SFDR firms are struggling to find information / fulfill the information requirements for when preparing disclosures.
• The Commission also seeks views on the SFDR’s inconsistency or misalignment with existing EU sustainable finance legislation, including the Taxonomy Regulation, EU Benchmarks Regulation, Corporate Sustainability Reporting Directive, MiFID II and Insurance Distribution Directive and PRIIPs Regulation.
• The Commission asks whether the manager-level disclosures (Article 3 (integration of sustainability risks), Article 4 (PAI) and Article 5 (integration of sustainability risks in remuneration policies)) are useful at all and if these could be reshaped into sustainability-related disclosures across other pieces of legislation. This suggests that the entity-level disclosures could be removed entirely from the SFDR. The consultation paper also asks which PAI indicators firms find most useful, implying that certain PAIs could also be removed.
• The Commission asks whether uniform disclosure requirements should be introduced for all products, regardless of their sustainability claims, and seeks views on what this could include. This could potentially mean that products without sustainability commitments (such as Article 6 funds) would need to provide additional sustainability-related disclosures on engagement strategies, investment exclusions, how ESG-related information is used in the investment process or use of certain PAI indicators.
• The Commission asks a number of questions on the appropriateness of the current pre-contractual, website and periodic disclosure formats for the product-level disclosures. The Commission also asks whether certain product-level disclosures should be expressed on a scale as part of demonstrating a product’s sustainability features.
• The Commission highlights the SFDR’s use as a labelling regime in respect of the Article 8 and 9 product categories and seeks feedback on the merits of introducing a product categorization system based on precise criteria to address this. The Commission posits achieving this by either:
  • Developing the existing Articles 8 and 9 product categories, and their related concepts, to more clearly define the scope of Articles 8 and 9 by including additional (minimum) criteria; or
  • Introducing a completely new approach based on, for example, the product’s investment strategy (noting that such an approach would do away with the existing concepts for Articles 8 and 9).
• If a product categorisation system was set up, the Commission seeks feedback on how this would interact with existing EU legislation including, for example, whether the category a particular product falls into should be referred to in disclosures under other legislation (i.e. in a PRIIPs KID or as part of the MiFID II sustainability preferences).
• The Commission also seeks views on whether the SFDR should address marketing communications in relation to the use of sustainability related names for funds, a seeming nod to the Commission’s current proposals to introduce thresholds for ESG-related fund names which we covered here.

Whilst at present the consultation is an exercise in gathering stakeholders’ views on a wide range of SFDR topics, the level of detail sought by the Commission will raise questions over the extent of a potential overhaul of the broader SFDR framework. The SFDR journey remains far from over therefore and will remain a key area of focus for managers marketing funds in the EU.