In response to the European supervisory authorities’ joint consultation on regulatory technical standards for the sustainable finance disclosure regulation, the European trade group Efama has proposed several modifications aimed at improving the effectiveness of the regulation.

Sustainable finance has gained more spotlight in recent years, with increasing focus on environmental, social and governance (ESG) factors in investment decision-making.

As part of this trend, the SFDR was introduced to promote transparency and ensure that investors receive accurate and meaningful information about the sustainability of their investments.

However, Efama identified areas of concern within the SFDR and offered recommendations for policymakers in a issued on Thursday 6 July 2023.

Pragmatic and future-proof approach to technical work

Efama stressed the importance of adopting a pragmatic and future-proof approach to the technical work carried out by the European supervisory authorities.

The trade group urged policymakers to ensure that given the unresolved fundamental issues within the SFDR and an by the European Commission, any technical changes made now do not become obsolete after the review.

While positive steps have been taken in proposing clarifications on principle adverse impacts (PAIs) and simplifying disclosures through a dashboard, Efama remains skeptical about the added value of expanding disclosures on the ‘do no significant harm’ assessment of sustainable investments, considering the anticipated further changes to the sustainable investment definition and the assessment of the principles.

Reporting standards alignment

Efama accentuated the need for alignment between the SFDR PAIs and the corporate sustainability reporting directive’s (CSRD) European sustainable reporting standards (ESRS).

The recent proposal by the European Commission to reduce companies’ reporting obligations has resulted in a misalignment in terms of scope, definition, materiality assessment and timing, the trade group argued. Efama called on policymakers to restore this alignment, ensuring that fund managers receive the necessary non-financial information to produce accurate SFDR client disclosures.

Consumer testing skipped

Efama expressed disappointment that consumer testing was not conducted prior to the . It contended that involving consumers in the testing process would have provided valuable insights into the effectiveness and understandability of the disclosures.

Furthermore, Efama said that consulting on areas that have undergone extensive and conclusive consumer testing would have been more productive than having technical discussions without guidance on whether these changes will enhance clients’ understanding of the disclosures or not.

Sufficient time for implementation

Efama stressed the need for sufficient time to implement the eventual changes in regulatory requirements. Moreover, constantly changing disclosures can erode consumer confidence in sustainable products, hindering progress in the broader sustainable finance agenda, it stated.

To address this concern, Efama strongly recommended establishing a minimum one-year gap between the publication of regulatory technical standards and their implementation. It said this timeframe would allow the financial industry to adequately prepare and adapt, ensuring a seamless transition without undue disruption.

Regulatory policy advisor at Efama, Anyve Arakelijan, commented: “We are still at the inception of the EU’s sustainable finance framework, which means everything, including disclosures, is in constant flux. We understand how hard it is to strike the right balance between meaningful disclosures for investors and practical implementation for the industry. We must, however, stop tinkering around the edges and address the outstanding issues within SFDR before making technical changes which may be made obsolete by the upcoming SFDR review by the European Commission.”