EU SFDR review: Summary of industry views

The European Commission has published a Summary Report summarising the responses to its September 2023 consultations on the Sustainable Finance Disclosure Regulation (SFDR).

Although the Summary Report does not include any indication of the Commission's thinking or possible future changes, it provides a useful (and sometimes surprising) insight into the industry's views on SFDR and the future of the EU's sustainable finance regime.

The Commission notes:

Support for setting uniform disclosures for all financial products in the EU plus additional reporting for products making sustainability claims.
Support for a categorisation system.
Split responses on whether to convert Articles 8 and 9 into categories or use new criteria.
Support for a transition focus category.

The Summary Report does not provide any indication of when any new rules might be published but we do not expect this to be until after the new European Commission is in place at the end of this year at the earliest.

We set out below some more details on the key messages from the Summary Report.

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The September 2023 consultations

The September 2023 consultations (which comprised a Targeted Consultation and a Public Consultation) included a series of questions on the possible reform of the SFDR with a particular focus on addressing shortcomings and making it more user friendly. No concrete proposals were suggested but the questions covered a diverse range of matters including the introduction of a potential categorisation system; the possibility of product level disclosure requirements for all financial products offered in the EU; and a reworking of the SFDR disclosure requirements.

We discussed the September 2023 consultations in more detail in our briefing: Possible changes to the EU SFDR? The European Commission seeks views | Travers Smith.

General views on the SFDR Regime

General support for SFDR: Respondents were overwhelmingly supportive (89%) of the broad objectives of the SFDR and the need for sustainability disclosures. There was also a similar level of support (94%) for measures at EU, rather than national, level.
Significant limitations to the current regime: Respondents identified a number of problematic areas including:
- Costs of complying with the disclosure requirements are not proportionate to the benefits provided.
- Lack of legal clarity regarding key concepts such as "sustainable investment".
- Limited relevance and usefulness of certain disclosure requirements.
- Difficulties in obtaining good quality data with 98% of respondents experiencing difficulties.
- Difficulties with the requirements around the principal adverse impact regime including the unclear interaction between the principal adverse impact product and entity level disclosures.
Use of SFDR as a labelling and marketing tool: A very high majority of respondents thought that SFDR was being used as a labelling and marketing tool (particularly Articles 8 and 9) rather than being limited to its intended function as a disclosure tool. This is consistent with our own understanding.
Need for consistency across EU legislation: A need for consistency between SFDR and other EU sustainable finance requirements was identified such as those in the EU Taxonomy Regulation and possible alignment of SFDR pre-contractual disclosures with the PRIIPs KID.

Changes to disclosure requirements

Application of disclosure requirements to all financial products: There was majority support (56%) for standardised disclosure requirements for all financial products, regardless of their sustainability claims i.e. including Article 6 products. This was surprising.
Two levels of disclosures: Generally applicable disclosures should be limited to "key meaningful indicators", possibly focused on climate, diversity and human rights, with additional disclosures for products making sustainability claims.
No entity-level disclosure requirements in SFDR: Most financial market participants and financial advisers did not consider it appropriate to include entity-level disclosure requirements in the SFDR. There were also split opinions on how useful such disclosures are in practice.
Simplified entity-level disclosure requirements: Most respondents supported simplifying the entity-level requirements and streamlining these across different pieces of EU legislation. Potential changes included focusing principal adverse impact reporting requirements on material issues or on a reduced number of cross-sectoral indicators.

Categorisation system for financial products – the future of Articles 8 and 9

Support for EU categorisation system: There was strong support for the establishment of a voluntary EU categorisation system for financial products. It therefore seems likely that this will be adopted in some form.
Roughly even split between new categorisation or 8/9 categorisation: There was a slight preference for a new categorisation scheme, but the results were close. The majority of respondents from the asset management industry supported scrapping the Articles 8 and 9 categories in the SFDR and creating a number of new categories of products based on investment strategy. (This contrasts with feedback we have received from the alternative asset management industry, which preferred categories based on Articles 8 and 9 on the basis that, despite their shortcomings, they were at least known quantities.)
Approach to new categories: The suggested approaches to categorisation in the Targeted Consultation received differing levels of support.
- Relatively little support for a specific category for products that follow an exclusion strategy on the basis that negative screening is already a common ESG strategy.
- Significant support for a specific category for products with a transition focus.
- Significant support for categories to be based on investment goals rather than investment strategies.
- Support for categories to be easily understandable by retail investors.
Use existing framework: Any criteria and indicators should, where possible, leverage the existing sustainable finance framework.