Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced on Wednesday a series of proposed amendments aimed at extending and simplifying the EU’s Sustainable Finance Disclosure Regulation (SFDR). Proposals include the addition of information regarding the decarbonization targets of financial products, and the inclusion of a dashboard providing information about products’ sustainable and taxonomy-aligned investment.
The new proposals follow the request by the EU Commission for the ESAs, which include The European Banking Authority (EBA), The European Insurance and Occupational Pensions Authority (EIOPA), and The European Securities and Markets Authority (ESMA) to review indicators for the SFDR’s indicators for principal adverse impact (PAI) and financial product disclosures.
The EU SFDR forms part of the EU’s Action Plan on financing sustainable growth. The regulation aims to establish harmonized rules for financial market participants including investors and advisers on transparency regarding the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products.
The regulation includes classification levels for sustainability-focused investment funds, including ‘Article 8’ funds that “promote environmentalEnvironmental criteria consider how a company performs as a steward of nature. or socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. characteristics or a combination of those characteristics,” and the more stringent ‘Article 9’ funds, “which have sustainable investment as their objective.”
While the requirement for asset managers with sustainable investment products to begin providing disclosures under SFDR took effect in January 2023, uncertainty remains around some of the key reporting details, such as the PAI requirements. Recently, for example, asset manager Amundi reclassified nearly all of its $45 billion Article 9 funds to lower sustainability levels, saying that “the current regulatory framework does not yet allow the financial industry to respond in a uniform manner as to what should be considered “sustainable” or not.”
In order to address some of the current rules’ complexity, the ESAs have proposed consulting stakeholders on changes to the layout, structure and language of the regulation’s template, and developed a dashboard of key information for pre-contractual and periodic disclosure, such as whether the investment product has a sustainable investment objective or promotes sustainability characteristics as well as the minimum amounts of sustainable and taxonomy-aligned investments and PAI and GHG reduction targets.
Additional proposals include extensions to the list of universal socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. indicators for the disclosure of the PAIs, refinements to the content of other indicators for adverse impacts, GHG target disclosures including the level of ambition and how the target will be achieved, among other technical revisions to improve and simplify disclosure requirements.
Alongside the release of the new proposals, the ESAs announced the launch of a consultation into the proposed rules, which is open until July 4, 2023. While the ESAs were initially requested to present the rules this month, they informed the EU Commission late last year of a six month delay, with the final report now expected to be released by the end of October 2023.
Click here to access the consultation.
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