The European Commission has proposed further weakening of Sustainable Finance Disclosure Regulation (SFDR), the EU’s transparency framework for financial products integrating environmental or social aims.
The commission said the amended rules would result in simpler and more usable information for investors, enabling them to make better informed choices. Providers of financial products will see a reduction in disclosure requirements. The commission said it hopes the changes will encourage participation of retail investors in EU capital markets and help boost the flow of funds towards sustainable objectives.
Key elements of the proposal include:
- Deleting entry-level disclosure requirements for Financial Market Participants (FMPs) regarding principal adverse impacts indicators. The aim is address overlaps between the Corporate Sustainability Reporting Directive (CSRD) and the SFDR which significantly reduces the implementation costs associated with the SFDR. In the future, only the largest FMPs subject to the updated thresholds under the CSRD will need to disclose their impacts on the environment and society.
The Commission is also proposing a significant reduction in product-level disclosures, limiting them to data that is available, comparable, and meaningful.
- A simple categorization system for financial products making ESG claims.
Sustainable category: products contributing to sustainability goals (e.g. climate, environment or social goals), such as investments in companies or projects that are already meeting high sustainability standards;
Transition category: products channeling investments towards companies and/or projects that are not yet sustainable, but that are on a credible transition path, or investments that contribute toward improvements in e.g. climate, environment or social areas;
ESG basics category: other products that integrate a variety of ESG investment approaches but do not meet the criteria of the above-mentioned sustainable or transition investment categories (e.g. focusing on best-in-class performers on a given ESG metric, pursuing financial returns while excluding the worst ESG performers).
Categorized products would need to ensure that a high portion of investments (70% of the portfolio) supports the chosen sustainability strategy and exclude from all their portfolio investments in harmful industries and activities, for example companies in violation of human rights standards as well as those involved in tobacco, prohibited weapons and fossil fuels above certain limits.
“The Commission’s categories look structured on paper but lack the safeguards needed to add real value,” said said Thibault Girardot, Sustainable Finance Policy Officer at WWF European Policy Office. “If financial products with minimal ambition can qualify and fossil fuel expansion is not fully excluded, then the SFDR will continue to mislead investors and fail to mobilise the investments needed for the EU 2030 climate and environmental goals. This approach will also be unable to truly contribute to the Savings and Investment Union”,
The Commission proposal will now be submitted to Parliament and Council for their deliberation.
