EU Commission hosts SFDR workshop: discussing the shape of a possible labelling system, merits of expanding SFDR disclosures to all products and more

When the Commission issued its consultation on the implementation of the SFDR back in September (see our earlier blog post here), it noted its intention to host a series of online workshops and roundtables to discuss the current challenges of the SFDR and possible ways forward for sustainability disclosures in the EU.  The first of these workshops was held on 10 October 2023, with the Commission hosting a wide-ranging panel discussion on a number of key topics.   

A “Learning by doing” approach

The opening speech from European Commissioner Mairead McGuinness set the tone for the workshop and signalled that the Commission is currently in listening mode – it wants to know “whether [SFDR] has changed how investors behave, or how asset managers or financial advisors suggest products.”  There is acknowledgement that adjustments to the Regulation may be necessary. SFDR was one of the first elements of the EU’s sustainable finance framework, so the recognition of the need for reflection – particularly in considering how the Regulation interacts with other parts of the sustainable finance framework, financial regulations more generally, and the international landscape - is to be expected.  Moreover, McGuinness’ speech highlights that high on the list of the Commission’s concerns is the fact that the market is not using the Regulation in the way it was designed – “It was meant to be about transparency. But as you all know … instead it's being used more as a labelling scheme,” with market participants advertising products as being “light green or dark green” (articles 8 and 9, SFDR), without the SFDR setting out any binding thresholds or strict definitions for key concepts. 

Key issues covered by the panel

Amongst other matters, the Commission asked for the panellists’ views on the following topics:

Disclosures for all products, or just those with sustainability characteristics?: A key point of discussion was whether the scope should be expanded to require SFDR disclosures for all products.  A number of panellists favoured such a broader application of the disclosure obligations, and interestingly 60% of the audience when polled agreed with this view. Justification for such an expansion primarily centres on (i) the need to create a level playing field across products, (ii) the desire to enable investors to make more informed decisions, and (iii) assisting in the goal of mobilising the flow of capital to the green economy. Given the disclosure and cost burden such an expansion would entail, this will no doubt be the subject of further discussion. 

Designing a product categorisation system: There was a broad general agreement among panellists that a categorisation system would be welcome. However, there was a disagreement among the panellists on the exact form this categorisation system should take. Suggestions varied and included:

• A simple ‘sliding scale’ classification of products from letters A to F, building on the framework used by MiFID around sustainability preferences, where the objective would be to fill each of the sustainability preferences described in MiFID with actual financial product categories.
• Categorising products based on the relevant investment strategies involved (to sidestep the difficulty of finding common minimum criteria for a labelling system that would apply across products using different investment strategies).

Agreeing a set of minimum criteria for product categories is a challenging issue, and will require careful consideration.  The FCA is grappling with this in the context of the forthcoming UK SDRs – a point not lost on the Commission.  The Commission will be watching closely to learn from the national categorisation systems evolving elsewhere (whether from the work being undertaken in France or Germany, the UK or further afield), as thinking develops on what direction it might be appropriate to take for the SFDR.

Distinguishing disclosures for retail and professional investors:

There was general acknowledgement that disclosures in their current state are challenging for retail investors to understand. The Commission is interested to hear views on how to address this.  A number of panellists seemed to favour an approach which provided for a common baseline standard (e.g., for retail investors) with enhanced expectations for specific classes of investor.  The baseline retail disclosure could also set an obligation to provide links to the more detailed disclosures for those more sophisticated retail investors who wish to delve deeper. The common baseline standard could take the form of a scoring or ranking system such as what is currently used for nutrition scores/or energy ratings to enable retail investors to have a quick first understanding of the level of ambition of the financial product before delving into the detail.

Compliance costs: Firms have incurred significant expense in setting up the new systems necessary to ensure SFDR compliance – ongoing reporting too comes with cost implications. The Commission is keen to understand whether compliance costs are proportionate to the outcomes produced.  Looking ahead, changing the reporting system would necessarily increase costs, and the Commission is alert to the need to balance between improvement of the SFDR framework and stability. A related point is the interaction of the SFDR with other disclosure obligations - by ensuring these regimes are linked to one another, data points will be more easily reused, saving time and money. To the extent that the European single access point is successfully established, this is seen as a way of reducing costs immediately.  

Funds with a transition strategy: There was a general agreement among panellists that one of the lessons learnt from the first version of SFDR was that SFDR should have focused more on the transition. Going forward, it was suggested that funds with a transition strategy should be included in the SFDR framework.

The interplay with other sustainable finance legislation: As noted above, there is a need for the SFDR to interact effectively with other EU legislation, whilst also being mindful of the wider international landscape. Creating consistencies is key to reducing costs and compliance burdens, in turn encouraging the mobilisation of capital to the green economy.  

Next steps

Further technical workshops are being organised for the coming months – and will possibly run into the beginning of 2024.

Stakeholders have until 15 December 2023 to provide their input towards the consultation -  following which the Commission expects to publish a report or staff working document.

What happens thereafter is less clear – the Commission has highlighted that it will be for the next Commission to choose how to take the consultation (and the other work that will be undertaken in connection with this consultation) forward.  The Commission at this stage cannot commit to whether there will in fact be an SFDR review and if so, its timing or the content of such a review.

Resources

A link to the Workshop recording can be found here