Regulators propose changes to SFDR

Three European Supervisory Authorities have published proposed changes to the Sustainable Finance Disclosure Regulation (SFDR).

The ESAs are looking to simplify the sustainable and transition categories for financial products to improve clarity for consumers. The ESAs have proposed the following changes:

Article 8 and 9 funds to be replaced by two new product categories: the sustainable product category and the transition product category.

The sustainability characteristics of products should be set out in a grading scale of A-E meaning that investors will have a standard method to measure the sustainability features of a product.

An update to the sustainable investment definition: Alignment between the sustainable investment definition set out in the Taxonomy Regulation and the definition under SFDR.

Bhavik Parekh, Research Associate at MainStreet Partners, has commented, “The new joint opinion by the ESAs, if implemented into regulation, would represent a total shift in the direction of sustainable fund regulation. The introduction of categories and/or with an indicator is a very different approach from the Article 6, 8 or 9 system we currently use in Europe. The simple categorisation method is considered clearer to investors and could potentially increase interoperability with other regulation such as the UK’s SDR. Implementing an indicator approach would potentially be more confusing especially if combined with categories. As acknowledged by the ESAs, the definition of a “sustainable investment” is not easily compared between asset managers and likewise, we believe the same problem would be present with indicators, hence our preference for the category option.

“A notable issue here is that this would represent a significant upheaval in regulation that was perhaps beginning to settle. This would keep the regulatory burden high in the short term and risks putting off financial market participants entirely. The caveat to this is that some change is needed so when it does come, it should be more robust/longer lasting and regulators should allow plenty of time to allow transition to the new system.”

The proposals will now be considered by the European Commission in the coming months.