Europe’s three main financial regulatory agencies, the European Supervisory Authorities (ESAs), have released a new assessment of the Sustainable Finance Disclosure Regulation (SFDR), recommending key updates, including the creation of new “Sustainable” and “Transition” categories for financial products like investment funds and insurance.
These changes aim to tackle greenwashing and clarify sustainability claims for investors, particularly retail investors.
The ESAs, comprising the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA), suggested that the current SFDR classification system, particularly its ‘Article 8’ and ‘Article 9’ designations, has been misused as a de-facto sustainability label, causing confusion and potentially misleading investors.
In the assessment, the ESA’s addressed the Commission’s Article 8 and 9 concerns, stating:
“The ESAs are in favour of the introduction of regulatory product categories that would help address the greenwashing problems arising from the misuse of the disclosures under Article 8 and Article 9 of the SFDR and generate clarity for investors, in particular retail investors.
“Despite SFDR being conceived by the co-legislators as a disclosure regulation, the two disclosure regimes set out in Article 8 and Article 9 of the SFDR have been used as sustainability labels by financial market participants and understood as labels by investors. This approach has undermined the intended goal of the disclosures and created confusion for investors.”
The proposed Sustainable category would focus on products that invest in fully sustainable activities, while the Transition category would include products that target investments in firms working towards sustainability over time. Additionally, the European Supervisory Authorities (ESAs) suggested introducing a sustainability indicator to provide clearer information on financial products’ sustainability profiles.
Under the Sustainable Finance Disclosure Regulation (SFDR). this scale would make complex sustainability information more accessible, with options to apply one indicator for all products or separate ones for those in the “Sustainable” and “Transition” categories.
Further recommendations include stricter disclosure rules for financial products and restrictions on using ESG-related terms for those without qualifying sustainability features.
In their assessment, the ESAs addressed the need for clearer marketing and disclosure rules. Products that feature sustainability attributes but don’t fit into the proposed categories would face stricter disclosure guidelines and limits on the use of ESG-related terms in marketing.
For products without sustainability features, ESG terms would be banned, and they might be required to disclose minimal information on their negative sustainability impacts.
The report also highlights confusion arising from having two competing definitions of sustainable investments: the SFDR and the EU Taxonomy. The ESAs recommend using the taxonomy as a science-based benchmark for sustainability, urging the European Commission to finalize it for all environmentally sustainable activities and extend it to social sustainability.
Eurosif, an association promoting responsible investment, largely welcomed the ESAs’ proposals but raised concerns about allowing limited ESG terminology for certain products outside the new categories.
Eurosif said:
“To further prevent greenwashing, and should the ESAs’ suggested classification be implemented, this should be allowed only as long as there are strict safeguards, including the demonstration that these products do not harm sustainability objectives.”
