Maren Stadler-Tjan, investment funds partner at the law firm of Clifford Chance. Photo: Clifford Chance

Maren Stadler-Tjan, investment funds partner at the law firm of Clifford Chance. Photo: Clifford Chance

Clearer definitions and a move away from the use of “article 8” and “article 9” as investor labels are among the changes that market leaders hope to see addressed in the EU’s review of the Sustainable Finance Disclosure Regulation currently in progress.

“Further clarity around some of the key concepts in the SFDR should be provided, such as allowing room for transitional strategies particularly in the real estate sector,” , investment funds partner at Clifford Chance, said of a current review of the EU’s Sustainable Finance Disclosure Regulation by the European Commission.

Sustainable and responsible investing has gained significant momentum in recent years, with investors increasingly seeking opportunities that align with their environmental, social and governance values. The SFDR, which came into effect in March 2021, has been the cornerstone of the EU’s sustainable finance initiatives. As the sustainable investment landscape continues to evolve, the SFDR is set to face a revision along with the consideration of new product categories, as part of the comprehensive assessment.

On 14 September 2023, aiming to evaluate and improve the SFDR regulation, the European Commission opened a public consultation, which closes on 15 December 2023. Concepts around , the possibility of SFDR moving from a disclosure regime to a labelling regime, questions on entity level disclosures and the interaction with other EU sustainable finance regulations are some of the key areas that are being examined in the targeted consultation, Stadler-Tjan told Delano during an interview.

The interests of retail investors must be at the heart of the review

Graham Hookhead of UK government relations & public policyInvesco

“We welcome the commission’s review of SFDR and its proposals to improve disclosures, address key challenges and set out options for how the disclosure regime could evolve in the future,” Graham Hook, head of UK government relations & public policy at Invesco, said of the consultation. “The interests of retail investors must be at the heart of the review. Any changes must help deliver clear, simple and decision-useful information that retail investors need to successfully navigate the sustainable investment universe.”

When asked about what he would like the commission to modify, Hook replied, “There are significant opportunities to better align SFDR with related parts of the EU’s sustainability-focused legislative and regulatory framework, such as [the European Securities and Markets Authority’s] proposed guidelines on fund naming, proposed changes to disclosure, and the Corporate Sustainability Reporting Directive. Without closer alignment and greater clarity, there is a risk that retail investors will be left perplexed by sustainability disclosures, and that data quality issues, and reporting gaps will persist.”

When quizzed about the reasons behind the European Commission’s decision to conduct an in-depth assessment of the SFDR’s effectiveness, Stadler-Tjan, explained that while it is the market that has been calling for clarifications and a consultation, the commission’s motivation seems to stem, among other reasons, from the fact that investors are already using SFDR as a labelling regime, . This created a challenge in finding a balance between investor expectations and the actual concepts outlined in SFDR and surfaced the need for the assessment.

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One of the main challenges that have emerged with the SFDR is the lack of clarity around its concepts and categories. Stadler-Tjan said that, “The industry needs a robust framework that aligns with the market expectations.”

Article 8 funds lack clearly defined criteria and the market does not yet have sufficient clarity on the concepts of “sustainable investment” and “do not significant harm” to name some examples, and the scope of article 9 funds is not well defined, underlining the importance of consistency and a clear definition of sustainable investments, she commented.

Preference for sustainability labels

The most important part for the asset management industry is in the 4th part of the consultation that refers to two possible approaches, In the opinion of Dennis Haensel, global head of ESG investment solutions & ESG advisory at DWS. The first option is the extension of the existing SFDR Level I requirements, maintaining the methodologies used and their publications, and the second is a completely new approach with 4 different sustainability labels for products. In most industry discussions, a strong preference can be seen for the second approach with 4 sustainability labels. However, he expects that in the future there will be a minimum requirement for all products to describe the sustainability characteristics of their investments. “Nevertheless, this consultation has an incredibly high impact on the future design of sustainability products and the underlying methodologies,” Haensel emphasised. “We hope that the existing building blocks such as principal adverse indicators will continue to exist in both possible scenarios”.

SFDR review process and the way forward

Addressing how the SFDR is being reviewed, Stadler-Tjan said, “I wish the commission pays attention to the sequence of events and prioritises the SFDR consultation first, followed by addressing greenwashing and fund naming and finally the RTS overhaul. Doing it in reverse order is a matter of real concern for the market.”

Although the SFDR has contributed to promoting transparency in the European financial market, the current regulatory framework grapples with issues related to clarity, consistency and alignment with other EU sustainability initiatives, the industry experts said. The European Commission’s consultation on the SFDR presents a promising opportunity to address these challenges.

The headline of this article was modified on 18 October to more clearly indicate that not all industry professionals quoted have taken a position on the use of sustainability labels