Regularly under fire since its entry into force in 2021, the Sustainable Finance Disclosure Regulation (SFDR) was the subject of a European Commission proposal to simplify it on Thursday 20 November (see EUROPE 13671/25, 13739/17).
The objectives of this revision are to strengthen the framework, prevent greenwashing, make the framework more accessible to retail investors and more usable for financial market players.
“One of the main criticisms of the current framework is that it has been used as a de facto labelling scheme, which was not the intention”, explained a Commission expert. “It was designed as a simple disclosure regime, but as the industry clearly needed to be able to communicate ‘ESG’ [environmental, social and governance] claims, it used the SFDR as a labelling scheme”.
To prevent this, the Commission has introduced certain conditions and minimum criteria for ESG claims in this revision. It therefore proposes a simple categorisation system for financial products, divided into three, based on existing market practices: the ‘sustainable’ category, the ‘transition’ category and the ‘ESG basics’ category.
The first covers products that contribute to sustainability objectives, such as investments in companies or projects that already meet high sustainability standards. The second group of products channels investments towards companies and/or projects that are not yet sustainable, but are committed to a credible transition path, or investments that contribute towards improvements. The third category includes other products which incorporate various ESG investment approaches, but which do not meet the criteria of the other two categories.
These categories are designed to simplify the investment process for retail investors and help them make informed investment decisions. According to the Commission, the products classified in these categories should ensure that 70% of the investment portfolio supports the chosen sustainability strategy, and exclude investments in harmful industries and activities. This includes, for example, companies that violate human rights standards, as well as those involved in tobacco, prohibited weapons and fossil fuels above a certain threshold.
Alignment with the CSRD. The Commission also suggests removing entity-level disclosures, i.e. the disclosures that financial market participants are required to provide at company level, at the level of the entity itself. “This was considered to be largely duplicative with disclosures required under the ‘CSRD’ Directive on corporate sustainability reporting”, explained the expert. The ‘CSRD’ has also been simplified (see EUROPE 13750/3). The aim is therefore to align these two proposals.
The Commission is also proposing a significant reduction in the product level disclosures, limiting it to available, comparable and meaningful data.
Although it welcomed the proposal, the European Consumer Organisation (BEUC) regretted that not all categories of sustainable investment excluded the expansion of fossil fuels. For its part, Better Finance, the European federation of investors and users of financial services, considers that the ‘ESG basics’ category is too broad, which risks “becoming a catch-all for products with limited sustainability merits, increasing confusion rather than reducing it”.
Read the proposed revision: https://aeur.eu/f/jk5 (Original version in French by Anne Damiani)