The European Commission has launched a call for evidence on the Sustainable Finance Disclosure Regulation (SFDR) with the aim of simplifying the regulation to improve clarity, remove inconsistencies and address data-availability issues.
The one-month feedback period will, alongside input from previous consultations on how to improve the regime, inform an impact assessment later this year.
The Commission said any suggested adjustments will be examined in the revision of the regulation scheduled for Q4, in line with its objectives to simplify sustainability reporting for companies.
No further public consultation will be conducted, the Commission said, but further “targeted outreach” may be carried out with stakeholders, supervisors and other experts when it finalises the proposals to reform the rules.
The EU executive said the call for evidence aims to review the framework with the goal of “simplifying the framework, enhancing its usability and preventing greenwashing”.
A key objective will be to adapt the framework to the potential changes to disclosure obligations under the Corporate Sustainability Reporting Directive (CSRD) and EU Taxonomy rules, while also considering voluntary reporting standards for smaller companies.
While SFDR was not included in the Commission’s sustainability Omnibus – which proposed changes to the CSRD, EU Taxonomy and Corporate Sustainability Due Diligence Directive – the regulation interacts closely with the first two regulations.
The Commission said that the upcoming SFDR review should “increase legal clarity and ensure overall coherence of the rules” within the sustainable finance framework, including the proposed measures to simplify sustainability reporting for companies.
Stakeholders have been asked their views on the Commission’s understanding of the problems and possible solutions, and to share any relevant information they may have, including on the possible impacts of the different options.
Responsible Investor understands that the ultimate timing of the revision will continue to depend on Omnibus negotiations between the EU co-legislators.
A European Parliament vote on the proposed amendments to the regulations has been tabled for October, but this date is not set in stone.
Options for pending review
The Commission said it aims to reduce the burden of ESG reporting for financial market participants to focus on the information that is “most meaningful” for investors.
Based on feedback so far, the Commission said there is broad support for a revised SFDR that would cater for different investor groups and types of financial products, make it easier for retail investors to understand the investment products, take better account of the international reach and exposures of investments, and help to direct investment towards diverse sustainability-oriented aims while avoiding greenwashing.
On the final point, the Commission said this would include not only activities which are already green but also investments in companies which are at earlier stages of the transition, and investments that support other objectives, such as security.
The Commission said possible options to be examined for a revised SFDR include targeted changes and clarifications as well as more far-reaching changes involving the establishment of a number of categories reflecting different sustainability objectives of financial products, underpinned by common criteria.
These could involve products contributing to a sustainability objective, products contributing to the transition, or products contributing to other ESG strategies.
On product categories, these should be “easily understandable by retail investors”, accommodate different sustainability objectives reflecting EU goals, and appropriately take into consideration current market practices in terms of available data and sustainability-oriented financial products on offer.
The Commission said the “potential creation” of these categories could give investors an easier-to understand overview of available products, with a lower risk of greenwashing.
The initiative could also help deepen capital markets and boost funding opportunities for EU companies, it said.
Following a targeted and public consultation on the implementation of the regulation, which ran until the end of 2023, RI reported that battle lines were being drawn around whether to work with the existing Article 8 and 9 categories or draw up new ones, and the Commission last year said there was “no clear preference” on what approach should be taken.
The EU executive also said the review of the regulation should aim to clarify the framework for both financial market participants and end-investors.
The review should therefore simplify key concepts; streamline and reduce disclosure requirements focusing on the most essential information for investors, and explore the case for categorising financial products that make sustainability-related claims.
Feedback to date
Stakeholders have previously reported “various challenges” related to the implementation of the regulation and possible adjustments to improve the effectiveness of the framework and ease its implementation, the Commission said.
Positive feedback on the regulation to date from stakeholders includes increased transparency and access to detailed ESG information, and “continued widespread support” for the broad objective of the regulation, and the “added value” of a common sustainability disclosure framework at EU level.
Turning to the limitations of the regulation, the Commission said participants have reported a “complex and costly” implementation of the regulation and a “large majority” of stakeholders said there were limitations in the regulation which prevented the objectives of the framework from being “fully achieved”.
Specific limitations flagged included: a lack of legal clarity on concepts; the limited relevance of certain disclosure requirements; overlaps and inconsistencies with other parts of the sustainable finance framework; and issues linked to data availability.
These limitations have led to various implementation challenges and undue operational costs for financial market participants, the Commission said.
It has also led to a lack of clarity and comparability regarding the sustainability of different financial products offered to investors in the EU, which has given rise to “both a risk of greenwashing and the unwarranted exclusion of some sectors” because of how some rules are applied in practice, the EU executive added.
Consequently, the Commission said the rules have been less effective in helping to mobilise private investment into the transition toward sustainable business practices, and Europe’s “strategic objectives”.
“These shortcomings would persist without targeted simplifications and adjustments,” the Commission stated, adding that this would hinder the flow of private finance to scale up and help fund competitive opportunities in the green transition across the EU amid “new and evolving” competing strategic priorities for “stretched public funds”.
The EU executive said that the necessary simplification and adjustment to the existing framework to avoid a “fragmented, inefficient single market for sustainable finance” can only be achieved at EU level.