Response to the EC consultation on the implementation of SFDR
In its response to the EC consultation on SFDR, Finance Watch pleads for minimum requirements for all products under SFDR and the introduction of new product categories with minimum requirements.
On 22 December 2023, Finance Watch responded to a consultation from the European Commission on the assessment of SFDR. The consultation seeks to collect feedbacks on the achievements of SFDR, its potential shortcomings, its interactions with other legislative texts and the possible changes to address identified weaknesses. In particular, the consultation introduces the possible establishment of a new categorisation system for financial products.
Finance Watch welcomes the initiative from the European Commission to revisit SFDR to improve its transparency and clarity. SFDR played an important role for raising awareness on sustainability concerns and set the grounds for the next elements of the sustainable finance agenda. However, disclosure requirements suffer important transparency limitations, including:
- the key concepts introduced for financial market participants to disclose how they integrate sustainability characteristics in their investment and engagement strategies, as required under Article 3 of SFDR, are not sufficiently detailed.
- the notion of principal adverse impact (PAI) consideration leaves too much flexibility, which undermines the comparability of the approaches of financial market participants (FMPs).
- the Article 5 disclosures on the integration of sustainability risks in remuneration policies require more details and minimum requirements to make them comparable.
- the broader scope of MiFID II (MiFID II covering financial instruments and SFDR covering financial products) creates a regulatory gap that needs to be bridged to avoid inadequate practices when considering sustainability preferences.
- the assimilation of the current SFDR categories to a form of sustainability label poses a real problem of transparency and evident greenwashing.
Finance Watch strongly encourages the inclusion of minimum requirements for all products and suggests that all products are required to disclose the PAI as a list of indicators to help understand the negative impact of the products. Today, it seems contradictory that sustainable financial products are subject to additional reporting costs compared to Article 6 products. Requiring all products to disclose a PAI statement would (1) allow comparing the negative impact of each product, (2) facilitate the availability of information for entity-level PAI statement and (3) facilitate the availability of information for funds of funds to report this information.
Finance Watch also strongly supports the introduction of new product categories with minimum requirements. It recommends the Commission to leverage from the three initial classifications proposed by the UK FCA, which is a meaningful approach. However, the additional “mixed fund” category introduced by the FCA may lead to unclear fund strategies and to a limited use of available levers for “sustainability impact” funds to also allow distributing these products as “sustainability focus”. Finance Watch also believes that the inclusion of a “theme investing” category, as proposed by the Commission, should not be proposed at the same level as the three previously mentioned categories as it rather consists in focusing on specific underlying values.
In addition to a “sustainability focus”, a “sustainability improver” and a “sustainability impact” category, the Commission should consider a classification for products that are socially or environmentally harming. This category could indeed play an important role to ensure that FMPs managing socially or environmentally harmful products take sufficient actions to classify their product under the “sustainability improver” category.
Finally, Finance Watch considers that the product categories should be exclusive as FMPs should develop consistent strategies and focus on a specific objective.