On October 9th, the European Commission hosted the workshop “The Sustainable Finance Disclosure Regulation - What Next?”. The online event had over 700 attendees, received over 330 questions, and lasted 2 and a half hours.
The event was organized in combination with a series of consultations that could culminate in upcoming changes to SFDR: a public consultation asking for an assessment of the regulation and a targeted consultation with a request for assessment from the FMPs impacted by SFDR.
Knowing that not everybody has 2 and a half hours to spare, Datia’s team summarized the main takeaways of the event. We listed below 7 of the topics that emerged in the discussions. They are ordered according to our perceived relevancy of each topic during the discussions.
1. Demand for a labeling system for financial products, especially to help retail investors
2. How disclosure expectations should apply to all financial products
3. Comments about the actual implementation of SFDR by FMPs
4. Evaluation of the costs for investors to adhere to SFDR
5. Positive view of sustainable investments according to SFDR
6. Potential rules about product names to prevent greenwashing
7. A reminder of the goal of SFDR
During the event, there were two polls. Here are print screens of the polls’ questions and answers:
See below a summary of the discussions around each topic:
1. A reminder of the goal of SFDR
“Sustainable finance is here and will remain very relevant”, said Mairead McGuinness, European Commissioner for Financial Stability, Financial Services, and the Capital Markets Union. In her opening speech, she emphasized how the European Union believes that private money also needs to be directed toward sustainable goals.
Speaking specifically about SFDR, McGuinness reinforced that it was meant to be about transparency. Instead, she said, “it has been used as a labeling scheme”. The SFDR, however, did not set strict binding thresholds and strict definitions. It also does not define what sustainable investments are. “And that was intentional”, says McGuinness.
Helena Viñes Fiestas, Chair of the Platform on Sustainable Finance, also reminded the audience that besides providing clarity to the market, SFDR also has the goal of mobilizing capital toward sustainable investments and decarbonizing activities.
2. Demand for a labeling system for financial products, especially to help retail investors
In her opening speech, Mairead McGuinness, European Commissioner for Financial Stability, Financial Services, and the Capital Markets Union, assessed that, given how the market is using “Article 8” and “Article 9” to describe their products, there might be demand for product categories.
This was certainly the topic most discussed in the two panels of the event and all participants seemed to strongly agree with McGuinness.
“I am very much in favor of creating a labeling system to help retail investors”, says Verena Ross, Chair of the European Securities and Markets Authority (ESMA), mentioning as an example the very broadly adopted energy performance grade. “Our research shows that retail consumers do not understand the current disclosures under SFDR”, she adds.
Even if there is a consensus, the pending question is still how to structure it. Panelists shared several ideas of criteria to be used: from using Principal Adverse Impacts to the proportion of sustainable investments and funds’ investment strategies. “But we still do not see an answer for which criteria to be used and what thresholds”, voiced Helene Bussieres, Deputy Head of Asset Management Unit of the European Commission.
There also seem to be some agreement about a labeling system based on the current use of Article 8 and 9 by the industry. “We should not throw the baby out with the water and there seems to be value in Articles 8 and 9 as a classification”, said Benjamin Dartevelle, Head of the Sustainable Finance Unit of the French Ministry of Finance.
But this presents limitations. Several panelists commented on how the current “Article 8” is very vague and broad. Patricia Dunne, Director of Securities and Markets Supervision of the Bank of Ireland, notices that, in the Irish market, products self-labeled as “Article 6” and “Article 8” are very similar. “If they decided to call themselves Article 6 or 8 seems to only be a matter of risk appetite from the managers”.
Finally, Michael Franz Schmidt, Member of the Sustainable Finance Advisory Committee of the German Federal Government, mentioned that in Germany a classification system using a scale was tested among financial advisors and retail investors. The result was that 2/3 of financial advisors who participated in the survey think the scale will be helpful and 75% of retail investors who participated said it was easily understood.
“Labeling could even be a cure for the whole ESG confusion in the market”, stated Piotr Koziński, Acting Managing Director of the Capital Market Supervision Division in the Polish Financial Supervision Authority (KNF). But he recommends as low a level of subjectivity as possible and to aim for simplicity. “You cannot go in an ESG crusade writing in a banner a slogan that no one can understand”, says Koziński, referring to the possibility of convincing the most skeptical investors about the relevance of sustainable products.
3. How disclosure expectations should apply to all financial products
Another topic on which all participants seem to agree was that sustainability disclosure should be expected from all types of financial products, not only those marketing themselves as sustainable.
“A broader scope of funds disclosing on sustainability will help investors make truly informed decisions”, commented Hadewych Kuiper, Managing Director of Investments and Member of the Management Board of Triodos Bank.
4. Comments about the actual implementation of SFDR by FMPs
Hadewych Kuiper was representing Triodos Bank to share the perspective of the market participants. “The implementation of SFDR was not a walk in the park. At times it felt like fitting a square pack in a round hole”, described Kuiper. After the implementation, though, Kuiper believes that SFDR has been helping Triodos Bank to make their investment process more traceable.
5. Evaluation of the costs for investors to adhere to SFDR
“We were fully aware that SFDR requirements would create costs for the financial market”, said Helena Viñes Fiestas, Chair of the Platform on Sustainable Finance.
But the panelists emphasized that there is hope for reduced costs in the future, as EU Taxonomy progresses, as ESRS gets implemented, and with the project of the European Single Access Point (ESAP). They also noted that the European Commission needs to be continuous in only proposing those changes to SFDR that are considered crucial, otherwise, the market will continue needing to bear the costs of new implementations.
6. Positive view of sustainable investments according to SFDR
“If you have a view of how you want to make a difference in society, it is not difficult to set your methodology for sustainable investments”, voiced Hadewych Kuiper, from Triodos Bank. The two panelists representing market participants seemed to be strong admirers of the definition of sustainable investments by SFDR, describing it as flexible. “The flexibility of sustainable objectives is important to create diversity in the market”, adds.
“The current EU Taxonomy is useless to creating financial products that are broadly sustainable”, added Michael Franz Schmidt, a member of the Sustainable Finance Advisory Committee of the German Federal Government.
7. Potential rules about product names to prevent greenwashing
“The first thing an investor sees when analyzing a fund is its name”, says Patricia Dunne, Director of Securities and Markets Supervision of the Bank of Ireland. “A convention about names directly addresses the point that we have been discussing: transparency and clarity for all investors, but particularly for retail investors”, explains.
She reminded the audience that, in February 2023, ESMA concluded a consultation on the topic. The answers to the consultation are available on ESMA’s website. No actual recommendations were yet made on the topic.