The British Chamber of Commerce in Luxembourg and Linklaters are organising an and the Sustainable Finance Disclosure Regulation (SFDR) on 5 October. Linklaters’ Elodie Gianferrara, who will moderate the panel, told Delano what’s at stake with the SFDR consultations, covered some of the challenges related to sustainable investing and gave a sneak peek of what panellists will discuss during the event.

Lydia Linna: The European Commission on 14 September launched two consultations around the Sustainable Finance Disclosure Regulation. What are these focusing on and what would you hope to see come out of it?

Elodie Gianferrara: The European Commission has indeed published on 14 September two consultation papers to solicit views from the public and the industry on .

The first paper is a public consultation aimed at individuals and organisations who only have a general knowledge of SFDR. It focuses only on the current requirements of the SFDR and its interaction with other sustainable finance legislation.

The second is a “targeted consultation” to gather feedback from public bodies and stakeholders who are more familiar with the SFDR and the EU’s sustainable finance framework as a whole. This targeted consultation paper duplicates each of the questions in the public consultation paper but goes on to pose a series of more detailed questions on potential changes to the disclosure requirements for financial market participants and the potential establishment of a categorisation system for financial products based on specific criteria.

One of the main points coming out of the targeted consultation is that the European Commission is envisaging a range of options on how to revise the SFDR framework, including creating a categorisation system for financial products that could:

-either build on and develop the distinction between article 8 and 9 [funds] and the existing concepts embedded in them such as sustainable investments, complemented by additional minimum criteria;

-or be based on a different approach, for instance, focusing on the type of investment strategy (e.g., products investing in assets that specifically strive to offer targeted measurable solutions to sustainability-related problems, products aiming to meet credible sustainability standards or adhering to a specific sustainability-related theme, products excluding activities or investees involved in activities with negative effects on people and/or the planet, products with a transition focus).

At the moment, the European Commission is gathering views and proposing various options. It has not yet communicated on any specific approach it intends to follow for the revision of SFDR. We would hope that a clear approach for revising the SFDR comes out of this consultation and that it addresses the challenges faced by the fund industry in the implementation of the regulation.

What would you say are the main challenges related to SFDR and sustainable investment today?

There are quite a few and they also depend on the investment strategy and specific asset class. I thus couldn’t give you an exhaustive list. But to name a few of the most common challenges we see in our practice:

-the infamous challenge of collecting the required data to comply with the disclosure and reporting requirements of the SFDR and taxonomy regulations;

-the constant evolution of the key concepts of the SFDR, as their interpretation is further refined and detailed by the supervisory authorities at EU and national level;

-the increased scrutiny of regulators on financial market participants’ sustainability-related disclosures and the integration of sustainability risks, that is translating into a common supervisory action that was launched during the summer by Esma [European Securities and Markets Authority] and the national regulators to assess compliance by asset managers, amongst others, with the SFDR and taxonomy regulations;

-the need to compose globally with different approaches of ESG and different legal frameworks on sustainability disclosures and, even within the EU, the problem of interoperability between the various regulations that do not fully align (this latter issue being one of the topics the European Commission is currently consulting on); and

-since the publication of the consultation papers by the European Commission on 14 September, the lack of legal certainty around how the existing SFDR framework will be revised and what will become of key concepts of the SFDR such as “article 8,” “article 9” and “sustainable investments,” considering the European Commission stated that one option would be to make these concepts disappear altogether.

Is regulation making it easier or more difficult to invest sustainably? How does regulation play a role in building trust in green investments?

The EU’s approach to achieve a transition to a more sustainable economy has been to use regulation as a primary tool--including the sustainable finance framework. Other countries have adopted other approaches and each of them has its strengths and gives rise to challenges.

The goal of the EU sustainable finance framework--comprising the SFDR, the taxonomy and also other EU regulations such as the CSRD [Corporate Sustainability Reporting Directive]--is to direct private financial and capital flows towards investments that will help the transition to a sustainable economy, to help investors better identify those investments and to ensure that such investments are credible.

As with any piece of legislation, being the first-mover to regulate a new space comes with its challenges. The EU was the first globally to come up with a regulation that provides a framework for sustainability-related disclosures and the SFDR was the first piece of legislation to do that. It has now been 2.5 years since the SFDR came into force and its implementation during that time has brought forward a number of issues as financial market participants tried to apply in practice the abstract concepts of SFDR.

The European Commission is aware of that and that’s what the revision of SFDR is all about--amending the framework to make it more attuned to the needs of investors and to address challenges financial market participants were faced with when implementing the SFDR. With the commission’s consultation, industry players have an opportunity to report the issues they have identified while implementing SFDR and one can hope that they will be heard and the second version of the text will be more attuned to the reality on the ground and will come closer to meet its goal.

Could you give us a sneak peek of what will be discussed during the panel?

I wouldn’t want to spoil the exact content of our discussion, which promises to be interesting!

We will touch upon the type of sustainable investments we are seeing on the market, some of the challenges arising in relation to developing products making sustainable investments and examples of solutions to address them and what we see on the horizon for the future of sustainable investments.

The “Diving into the SFDR Sustainable Investment” event, organised by the British Chamber of Commerce and Linklaters, will take place on Thursday 5 October at 18:00. .