Contributing Firms:
The European Commission has opened a ‘targeted’ consultation on the implementation of the Sustainable Finance Disclosures Regulation (SFDR) with the topics covered including interaction with other sustainable finance legislation; potential changes to the disclosure requirements for financial market participants and the potential establishment of a categorisation system for financial products. Can you comment on this and outline changes/updates that are needed to improve the SFDR framework?

Andrew Brennan, Director, Asset Management Financial Services, Mazars: The alignment of SFDR with other European sustainable finance regulations presents a complex landscape for stakeholders, characterised by intricate cross-references and diverse sustainability definitions. Ensuring uniformity in mandatory reporting and requirements is crucial to the success of these regulations, considering the intricate web of interconnected legal texts.
Andrew Brennan
Andrew Brennan

The varied interpretations of sustainability across different initiatives contribute to a lack of consistency in understanding the EU’s commitment to facilitating the ecological transition, undermining transparency objectives. While each facet of sustainable finance legislation has its distinct role, achieving an overall successful ecological transition necessitates a shared and precise comprehension of diverse investment policies and their implications. This shared understanding could be achieved through the establishment of a common definition of sustainability.

Specifically addressing Article 6 of SFDR, a critical enhancement involves mandating comprehensive disclosures on the Environmental, Social and Governance (ESG) impacts of financial products. Financial market participants and advisors should explicitly articulate how sustainability risks factor into investment decisions and the potential repercussions on the returns of offered financial products. Clarity is paramount, even when sustainability risks are determined to be irrelevant.

Regarding the categorisation system for financial products, an analysis of SFDR’s implementation reveals challenges and uncertainties, particularly in interpreting Articles 6, 8, and 9. These uncertainties create disparities and hinder effective application. To promote precision and diminish ambiguity, a more prescriptive articulation of these articles is necessary, while still allowing asset managers the flexibility to craft portfolios. The current heavy reliance on asset managers’ interpretations for categorising Articles 6, 8, and 9 exacerbates uncertainty and calls for a more standardised approach.

Lisa Kealy, Partner, EY: The introduction of SFDR was world leading, but as with any new piece of regulation, there can be areas that may not be implemented as intended or expected. So, it is very positive that the EU Commission has quickly taken a review of this regulation, to ensure that it is operating as intended, and eliciting the behaviours expected.

The establishment of a categorisation system may be the most striking aspect of this consultation and could see the EU’s proposal’s being aligned with the SDR in the UK. Managers in the UK have been broadly positive with the SDR requirements, and we would consider it very beneficial that the two regulatory regimes are aligned.