The European Commission has rejected suggestions that it introduce minimum environmental standards for Article 8 or Article 9 funds under the EU Sustainable Finance Disclosure Regulation (SFDR). On April 14, 2023, the Commission confirmed that it will not provide a definition for “sustainable investment,” nor will it introduce minimum qualifying sustainability criteria.
The clarifications, published by financial services commissioner Mairead McGuinness, come after European Supervisory Authorities asked the Commission in September last year for further guidance on the interpretation of the SFDR. This was against the backdrop of asset managers downgrading approximately €175 billion ($193 billion) of assets from Article 9 funds (i.e. those holding the SFDR's highest sustainability classification) to the broader, less demanding Article 8 label (which requires sustainability to be only one of the factors informing investment decisions) due to uncertainty over the rules.
The Commission has:
The Commission stated that: “Financial market participants must carry out their own assessment for each investment and disclose their underlying assumptions.” It added that funds subject to Article 9 under the SFDR remain “neutral” in terms of product design, investing styles, investment tools, strategies and methodologies.
Highlighting the ongoing challenges in compliance with the SFDR, on April 12, 2023 the European Supervisory Authorities (ESAs) published a Consultation Paper regarding potential amendments to the Delegated Regulation of the SFDR. The consultation will remain open until July 4, 2023.
The ESAs are proposing changes to the disclosure framework to attempt to address issues that have emerged since the introduction of the SFDR. The authorities are seeking feedback on a number of amendments, including:
Additionally, the ESAs have proposed a number of further technical revisions to the SFDR Delegated Regulation that seek to:
Taking the temperature: We have previously discussed how climate-related data assessment and disclosure arising in financing transactions remains a work in progress globally, as evidenced by decisions by a large number of asset managers to downgrade ESG funds due to a lack of guidance on how to apply the existing regulatory announcements in distinguishing Article 8 from Article 9 funds. What the Commission’s action demonstrates is that, in Europe at least, there is still much work to be done by regulators to resolve this tension. Financial firms will need to continue to be cautious about use of sustainability labels for investment products and must have a documented basis and methodology for supporting any such descriptions.