Financial Markets: Commission consults on sustainable finance disclosures

The EC has launched two consultations on the Sustainable Finance Disclosure Regulation (SFDR) in parallel, a public consultation and a more targeted consultation as explained below. This way, the EC wants to seek feedback if the regulation – which is actually designed to bring more transparency to the market and enable investors to make informed choices – meet stakeholders‘ needs and expectations, and if it is fit for purpose. Both consultations aim to gather insights from various stakeholders, including financial practitioners, NGOs, national competent authorities, professional and retail investors, on their experiences with the SFDR. The primary focus is on understanding the effectiveness of the SFDR, potential shortcomings, and its interaction with other European sustainable finance regulations, while exploring options for improvement.
While the public consultation is addressed to stakeholders who have a more general knowledge of SFDR, the targeted consultation is intended for market participants who have in-depth knowledge and/or (working) experience in the field of sustainable finance disclosure.
##### The targeted consultation „Implementation of the Sustainable Finance Disclosures Regulation (SFDR)“
This consultation covers four main areas:
1. Current requirements of the SFDR: The SFDR is designed to promote private investment in sustainable, climate-neutral initiatives. It requires financial market participants to disclose sustainability risks and adverse impacts on the environment and society. Respondents are asked to assess how well the SFDR is achieving its objectives and identify implementation issues, especially related to concepts and disclosures.
1.1. Disclosures of principal adverse impacts (PAIs): The SFDR mandates financial market participants to disclose PAIs on their websites, with specific indicators listed. It also requires them to indicate in pre-contractual documentation whether their financial products consider PAIs and report these impacts in periodic disclosures.
1.2. The cost of disclosures under the SFDR today: Respondents are asked to assess the costs of SFDR disclosure requirements, differentiating between one-off and recurring costs for both entity and product level disclosures.
1.3. Data and estimates: The ability to fulfil ESG transparency requirements depends on data availability and quality, which can be influenced by other disclosure requirements under the EU framework.
2. Interaction with other sustainable finance legislation: This section explores how the SFDR interacts with other sustainable finance regulations in the EU and seeks input on potential inconsistencies or misalignments. It also considers implications for other sustainable finance legal acts if the SFDR framework were to change. The mentioned legal acts include the Taxonomy Regulation (TR), the Benchmarks Regulation (BMR), the Corporate Sustainability Reporting Directive (CSRD), the Markets in Financial Instruments Directive (MiFID II), the Insurance Distribution Directive (IDD) and the Regulation on Packaged Retail Investment and Insurance Products (PRIIPs).
Both the SFDR and the TR introduce key concepts to the sustainable finance framework but have differences that could create challenges for market participants. The consultation aims to gather feedback on these interactions and potential implications for the future.
3. Potential changes to disclosure requirements for financial market participants: The EC explores potential changes to disclosures and links between disclosures and product categories, seeking stakeholder feedback. The SFDR principle states that products that claim sustainability must provide evidence of it in order to prevent greenwashing. However, questions are raised about the feasibility of uniform disclosure requirements for all products, including those without sustainability claims. The section also considers requiring additional information from financial market participants making sustainability claims if a categorisation system is introduced. This aims to provide proportionate information on product sustainability profiles, even for products without explicit sustainability goals.
3.1. Entity level disclosures: Financial market participants and advisers must disclose their sustainability risk integration policies and how they consider adverse impacts on sustainability factors. Entities with 500+ employees must provide due diligence statements, including adverse impact information. Additionally, remuneration policies must align with sustainability risk integration.
3.2. Product level disclosures: The SFDR includes product-level requirements concerning risk, adverse impacts, and sustainability performance for financial products. It specifies information to be included in precontractual documentation, periodic reports, and websites. While designed as a disclosure regime, it’s also being used for labelling, indicating a possible need for sustainability product categories. Section 3 of SFDR examines the necessity of altering disclosures and the link between product categories and disclosures. While it references ‚products making sustainability claims,‘ it does not predetermine their interaction. The Commission solicits feedback on transparency requirements and their alignment with product categories.
The SFDR aims to enable comparability between financial products based on sustainability. However, investors, particularly retail ones, may struggle to interpret product-level disclosures. To enhance effectiveness, these disclosures must be accessible and usable for end investors, especially in digital contexts. Feedback is sought on improving accessibility and usability.
4. Potential establishment of a categorisation system for financial products: Section 4 addresses the potential introduction of an EU-level sustainability product categorisation system, including criteria for product eligibility and specific disclosure requirements.
4.1. Potential options: Articles 8 and 9 of the SFDR have emerged as de facto product labels in response to market demand for tools to convey ESG/sustainability performance of financial products. However, concerns persist that this approach may lead to greenwashing risks due to the regulation’s original intent to encompass a wide range of products. The proliferation of national ESG labels could also fragment the European market, undermining capital market union development. The EC seeks feedback on the potential advantages of creating a more precise EU-level product categorisation system. Stakeholders are asked to share views on sustainability product categories and how they should operate, including potential disclosure requirements for products making sustainability claims. The questions assume that such a categorisation system would be voluntary, considering the high demand for sustainability products. Products claiming to fall under a specific sustainability category would need to meet corresponding requirements. Two potential approaches to a categorisation system are outlined: one building upon the distinctions in Articles 8 and 9 of the SFDR and existing concepts, and another one dealing with different investment strategies unrelated to existing concepts.
4.2. General questions about the potential establishment of sustainability product categories: Stakeholders‘ views are sought on additional disclosure requirements if a product falls into a specific sustainability product category and on the creation of a governance system if a product categorisation system were to be introduced.
4.3. Consequences of the establishment of a sustainability product categorisation system: Potential changes to disclosure regimes and categorisation systems must account for interactions with other sustainable finance legislation. Various questions address these interactions across various legal acts.
4.4. Marketing Communications and product names: The EC mentions the issue of marketing communications and the potential for misleading clients and stakeholders if sustainability-related expressions are not appropriately considered. Article 13 of the SFDR addresses this issue, prohibiting contradictions between marketing communications and disclosures, with provisions for the ESAs to draft implementing technical standards on presentation..
Responses to the consultation are sought online via https://ec.europa.eu/eusurvey/runner/sfdr-implementation-targeted-2023.
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##### The public consultation „Implementation of the Sustainable Finance Disclosures Regulation (SFDR)“
The public consultation only consists of a questionnaire which covers two main topics, which are also part of the targeted consultation:
1. Current requirements of the SFDR: The SFDR aims to enhance transparency regarding sustainability risks affecting investments and their impacts on the environment and society. Stakeholders‘ opinions on the effectiveness and efficiency of SFDR’s objectives are sought, along with feedback on implementation issues, especially related to concepts and disclosures.
1.1 Disclosures of principal adverse impacts (PAIs): The SFDR mandates financial market participants to disclose PAIs on their websites, with specific indicators. Entities must indicate if their financial products consider PAIs and report these impacts in periodic disclosures.
1.2 The cost of disclosures: The consultation distinguishes between one-off and recurring costs associated with SFDR disclosure requirements, addressing both entity and product level disclosures.
1.3 Data and estimates: The quality and availability of data for fulfilling ESG transparency requirements, including reliance on the Corporate Sustainability Reporting Directive (CSRD), are considered.
2. Interaction with other sustainable finance legislation: The SFDR interacts with various other parts of the EU sustainable finance framework, including the Taxonomy Regulation (TR), Benchmarks Regulation (BMR), CSRD, the Markets in Financial Instruments Directive (MiFID II), the Insurance Distribution Directive (IDD), and the Regulation on Packaged Retail Investment and Insurance Products (PRIIPs). The consultation seeks views on current interactions, potential inconsistencies, and implications of changing the SFDR legal framework.
The consultation also highlights the similarities and differences between the SFDR and the TR in defining sustainable investment and environmentally sustainable economic activities, emphasising the importance of aligning these definitions. Stakeholders are encouraged to provide feedback on these critical aspects of SFDR and its interaction with broader sustainable finance legislation to improve the regulatory framework effectively.
Responses to the questionnaire are sought online via this link.
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The Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) is organising a high-level online workshop in conjunction with the two consultations. Its primary aim is to deliberate upon the present hurdles facing the SFDR within the EU and explore prospective solutions for enhancing sustainability disclosures. Key topics on the agenda involve establishing improved coherence between SFDR and other elements of the EU’s sustainable finance framework. Participants will also consider strategies for enhancing the effectiveness of sustainability disclosures. Furthermore, there will be deliberations regarding the potential introduction of product categories. The insights and recommendations generated from this high-level workshop will likely have far-reaching implications for regulatory developments and practices in the EU’s financial markets.
Registration for this online event runs until 6 October. Interested parties can register for the Webex workshop here.