European regulators should continue cracking down on cases of manager non-compliance with the Sustainable Finance Disclosure Regulation (SFDR) because changes to the law are not due imminently, the European Securities and Markets Authority (ESMA) has warned.
The EU supervisor made the call in a report on Monday summarising the findings of a collaborative exercise with EU national regulators which assessed SFDR compliance among fund managers over the past two years, including taxonomy-aligned disclosures and ESMA expectations on managing sustainability risks.
Participating regulators reported finding “vulnerabilities” which were addressed through correspondence and other supervisory orders with managers, but nonetheless concluded that compliance was at “an overall satisfactory level”.
In its concluding remarks, ESMA said it “is also important to highlight that the concrete changes coming out of a future review of the SFDR will not be applicable in the near future”.
“Hence, it is important that national competent authorities remain vigilant on the supervision of the current framework and supervised entities continue applying the current provisions.”
The SFDR is up for a scheduled review later this year, which will take into account feedback received from a call for evidence launched by the European Commission in May alongside previous consultations.
Revisions will focus on simplifying the regime, enhancing usability and preventing greenwashing, and takes place amid a broader push to streamline ESG rules across the bloc.
ESMA has put forward its own vision for the SFDR as part of EU regulatory trio the European Supervisory Authorities (ESAs), which would be underpinned by a new sustainability rating scale for funds and the creation of a dedicated category for transition funds.
With regards to compliance with the current version of SFDR, EU regulators found repeated shortcomings owing to the use of “vague and overly general language” and missing details in product disclosures, statements on adverse impacts caused by products, and entity-level disclosures relating to policy and remuneration.
Regulators also noted cases where fund managers had low number of employees with dedicated sustainability roles or had employees with insufficient subject matter expertise, a lack of policies on managing sustainability risks and relevant escalation procedures, and no controls in place to ensure that descriptions of funds accurately reflect the methodology and data used.
They also found that there was a great deal of diversity in relation to the investments considered by fund managers to be sustainable, which was attributed to “a lack of clarity and detail and the resulting degree of discretion in existing regulatory requirements” under the SFDR.
Some 13 regulators found “zero or close to zero” evidence of incorrect or misleading disclosures, while 10 regulators found that more than 20 percent of funds they looked at raised red flags. Most of the regulators said that funds evidencing incorrect or misleading disclosures were self-categorised under Article 8 of the SFDR.
Only one regulator said that they had launched enforcement action due to fund manager non-compliance, while another “would envisage enforcement actions”. The other regulators said breaches could be solved through escalated supervisory measures and that most shortcomings are expected to be addressed in the coming weeks and months.
While acknowledging the preference to avoid taking enforcement measures, ESMA reiterated “the importance of using the full range of the supervisory and enforcement toolkit”.
It also said that establishing new sustainability categories with clear criteria in the revised version of the SFDR would mitigate regulator concerns over the current lack of clarity around sustainable investment definitions.