ESG – the EU Commission consults on how the SFDR regime is functioning

On 14 September 2023, the European Commission published two consultation papers on SFDR. In each case, the consultation period is open until 15 December 2023.

Both publications deal with issues around the implementation of the SFDR since its introduction in March 2021 and raise the prospect that they may lead, in time, to changes to apply the same ESG disclosure obligations to all funds sold in the EU given industry concerns on the costs and difficulty of compliance with the current rules.

It should be noted, though, that - at this stage, at least - the Commission is simply seeking input through a series of open questions, which allow respondents to give a view from 1 to 5, but with a text box provided for further comments.

Neither consultation proposes specific amendments to ether Level 1 or Level 2 of the SFDR (though such proposals can, perhaps, be expected when the Commission publishes its report in Q2 2024).

This note is intended to be high level only - we will be publishing our more detailed comments on the consultations in due course.

Commission Review into the functioning of the SFDR

The first consultation looks at how the SFDR is working in practice and the potential issues stakeholders might be facing in implementing it (in particular, its interaction with other sustainable finance legislation).

This forms part of the Commission's overall review of the functioning of the SFDR, intended to address a number of snags that have become apparent, including

• the lack of clarity in the use of SFDR as a disclosure regime
• its use as a labelling tool by the market and
• what additional safeguards may be needed to prevent greenwashing (given that there are no parameters to establish how ''green'' a product is).

The Commission seeks stakeholders' views on topics including the following:

• disclosure of principal adverse impacts (PAIs)
• the cost of disclosure under the SFDR
• the ability of FMPs to fulfil their ESG transparency requirements
• the SFDR's interaction with other sustainable finance legislation (including the Taxonomy Regulation, the CSDR, MiFID, and the PRIIPs Regulation)

The Commission's targeted consultation

The Commission's second publication is a targeted consultation aimed at identifying potential shortcomings with the regulation and exploring possible options to improve the framework.

The main topics covered are:

1. Current requirements of the SFDR
2. Interaction with other sustainable finance legislation
3. Potential changes to the disclosure requirements for financial market participants
4. Potential establishment of a categorisation system for financial products

It should be noted that the questions on Sections 1 and 2 replicate those in the consultation document referred to above. However, Sections 3 and 4 look to assess possible options to address any potential shortcomings in relation to

• entity level disclosures
• product level disclosures
• the pros and cons of establishing a categorisation system for financial products.