ESG – Simmons client note on the Commission’s SFDR consultation paper

As we reported last week, the European Commission has launched a public consultation on the functioning and future of the SFDR - the first step in a process which will eventually lead to significant amendments being made to the current SFDR regime.

Simmons & Simmons client note

Our client note, "SFDR 2 - significant new policy direction revealed", provides a summary of the following top 10 things that firms need to know about the consultation.

1. What is covered in the consultation?

2. Do firms need to take action in response to the consultation?

3. What are the options for SFDR 2 to replace article 8/9 with product labels?

4. What is Approach 1 to product labels?

5. How is Approach 1 similar to the UK SDR proposals?

6. What is Approach 2 to product labels?

7. What does the Commission ask about the current SFDR regime? 

8. How does the Commission approach SFDR's alignment with other EU regimes?

9. What changes are proposed to entity-level disclosures?

10. What changes are proposed to product-level disclosures?

Background to the consultation

It's widely acknowledged that there are significant flaws with the current SFDR.  Issues include:

• unclear or missing definitions of key concepts

• difficulties with the functioning of the principal adverse impacts (PAI) regime and

• the use of the article 8 and article 9 disclosure rules as de facto product labels. 

The consultation does not shy away from addressing these issues and, for that reason, we expect that the asset management industry will welcome the attention on the deficiencies. 

The consultation does not propose any specific new rules but the questions and associated commentary it contains clearly reveal the direction of travel of the Commission's thinking. 

As a result, the Commission's final report (due in Q2 2024) may well involve some fundamental changes being proposed to the entire policy concept of SFDR. 

Most importantly, SFDR 2 could become a regime based around opt-in ESG product labels which reference objective criteria, rather than the current subjective Article 8/9 disclosure regime.  Although not expressly acknowledged in the consultation, the Commission's approach seems to be directly inspired by the UK FCA's product labelling proposals under the Sustainability Disclosure Rules (SDRs).

Our client note assumes a working familiarity with the current SFDR regime.  For more general information on SFDR, please see our ESG notes for clients.