What to expect from the new version of SFDR?

Two and a half years after the SFDR (Disclosure) regulation came into force, the European Commission has launched a consultation on this ambitious regulation providing a framework for sustainability reporting in the financial services sector.

Open from mid-September to mid-December 2023, this public consultation is part of a comprehensive evaluation of the framework, to identify its potential shortcomings – particularly those relating to legal certainty, its ease of use and its ability to play its part in the fight against greenwashing. The Commission is calling on the market and all stakeholders to give their opinion on a possible second version of the Disclosure Regulation.

After two years of appropriation by financial sector players, the regulator is not entirely satisfied with the use of the SFDR framework. The regulations have certainly been widely adopted by the market, but the imprecision of certain concepts has given rise to numerous interpretations and a form of deliberate or unconscious greenwashing.

In particular, the Commission specifies that it designed the SFDR regulation to be a reporting framework imposed on financial product providers, and not a product labeling tool. The Article 6 / Article 8 / Article 9 classification is specifically targeted by the consultation, following its massive appropriation by management companies as a form of label distinguishing the most sustainable funds from conventional funds. This confusion explains the presence of similar strategies in Article 8 and Article 9 funds, as well as the downgrading of many financial products in 2022, on the eve of the application of the RTS (Regulatory Technical Standards).

Noting the current use of the SFDR regulation as a labelling system for sustainable funds, the Commission proposes two structures for categorising financial products.

The first option under consideration retains the structure of current regulations and transforms Article 8 / Article 9 reporting requirements into formal financial product categories. The regulator believes that a detailed definition of principles such as sustainable investment, “Do No Significant Harm” (DNSH) and “environmental and social characteristics”, as well as the introduction of minimum sustainability criteria, could facilitate and harmonise the distinction between the two types of product.

The alternative solution presented in the consultation is the creation of new categories of financial products based on the investment strategy applied. The Commission thus proposes classifying funds into 4 thematic categories:

1. Financial products that invest in companies that provide direct solutions to environmental or social issues

2. Financial products that invest in companies that improve their practices

3. Financial products based on an exclusion strategy

4. Financial products that invest in companies in transition

For the time being, the consultation does not specify whether these categories could replace the Article 6 / Article 8 / Article 9 classification, or whether they would simply be an addition to the existing framework. As the SFDR regulation is linked to other regulatory frameworks, such as the Taxonomy and MiFID II, removing the existing classification would affect these other texts and the progress they represent in terms of financial transparency.

The Commission is also considering the introduction of an obligation to verify the alignment of financial products with the relevant product category by an independent third-party body, which would also be required to carry out ongoing checks on product conformity.

Finally, the consultation raises the possibility that all funds offered within the European Union should be subject to certain uniform disclosure requirements, whether or not they implement an ESG investment strategy, to make it easier for investors to understand the sustainability profile of the product concerned.

About Positivéco

At Positivéco, we see new national and international CSR regulations as vectors for positive growth.

Our job: to improve the readability of your activities for better valuation.

Since 2009, we have been supporting financial institutions, public players, and listed and unlisted companies in the evaluation of their CSR policies, the production of their extra-financial reporting and the implementation of their climate investment and aid projects. Development.

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