EU Review Of SFDR 'welcomed' By Industry Despite Potential 'frustration'

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The regulator set out a 44-page questionnaire for its consultation yesterday (14 September) to gather a range of feedback on current SFDR requirements and its interactions with other sustainable finance legislation.

The Commission will also consider if any changes are warranted to make the regulations more effective, which include the possible scrapping of Article 8 and Article 9 product labelling.

Phil Spyropoulos, partner, financial services at Eversheds Sutherland, explained that the Commission had the power "to really reshape the SFDR, rather than just tweaking technical requirements" as a previous consultation from the European Supervisory Authorities had.

James Alexander, chief executive of UKSIF, said the Commission had "taken an important and necessary step" with the consultation to address the "implementation challenges of the SFDR framework".

EU regulators 'look to future' of SFDR application in financial services with in-depth questionnaire

Improvement to SFDR "should draw on the UK's SDR regime and other jurisdictions' fund labelling approaches," he noted, adding it was "encouraging" to see some of the new proposals "closely mirror the forthcoming UK SDR regime, which we are confident will enhance transparency for savers and their trust in sustainable investment products".

The Financial Conduct Authority's SDR regime is due to launch later this year, with the UK regulator stressing the framework is intended as a labelling regime, rather than a disclosure regime like its European counterpart.

"[We are] very confident that we did not want to do things like Articles 6, 8 and 9. The marketing people will want to have Article 9 because that will sell more…So we are not calling one label better than another," said FCA director of ESG Sacha Sadan last year. 

Laura Houët, partner in CMS' financial services and products team and global co-head of CMS ESG task force, highlighted that since the launch of SFDR in 2021, "there have been myriad issues and market confusion with many elements of SFDR from the outset and so this is a much-needed review".

She said: "With all of its good intentions, the broad scope of disclosure under Articles 8 and 9 have led to huge inconsistency of application and the current disclosures are widely considered to meet the needs of neither retail nor institutional investors."

Rather than inquiring simply about data availability, Spyropoulos was surprised the survey invited views on broad topics such as whether the aims of SFDR remain relevant and whether it achieves its objectives.

"This is quite remarkable given that 2023 is actually only the first full year of SFDR's application and it has already been tweaked several times," he explained.

Article 8 and 9 labels could be scrapped in upcoming SFDR consultation - reports

In the consultation document, the Commission said that SFDR was designed as a disclosure regime, but is being used as a labelling scheme, "suggesting that there might be a demand for establishing sustainability product categories".

It added that the use of Articles 8 and 9 as "de facto product labels" alongside the "proliferation of national ESG/sustainability labels" signalled the widespread demand for these types of tools, but the misuse of them has lead to "persistent concerns that the current market use of the SFDR as a labelling scheme might lead to risks of greenwashing".

Therefore, Houët argued that a "deep and wide review", which took the time to consider what the market needed and how the regulation fit with both the international picture and the wider EU sustainability framework was therefore "crucial".

However, the fact that many financial firms had dedicated significant amounts of time and effort to coming in line with the EU's current regime and the prospect of this now being changed or elements undone could prove "frustrating" for them, she said.