ESG: The ESAs publish a joint Opinion on the future shape of the SFDR

On 18 June 2024, ESMA, the EBA and EIOPA (together, the ESAs) published a joint opinion, 'On the assessment of the Sustainable Finance Disclosure Regulation (SFDR)' (the Opinion).

The Opinion calls, among other things, for a sustainable finance framework that caters for both (a) the green transition and (b) enhanced consumer protection while taking into account lessons learned from how the SFDR is currently functioning.

What's the Opinion's status?

The Opinion does not respond to a specific mandate from the European Commission but is, rather, an own initiative report by the ESAs, albeit developed in the context of the Commission's comprehensive review of the SFDR framework (at both Level 1 and Level 2).

As such, while it is an important contribution to the debate as to the future shape and direction of the SFDR, the Opinion is not legally binding on any entity, whether an NCA or a regulated firm, and it remains to be seen whether (and, if so, how far) the Commission will take up its recommendations.

What does the Opinion cover?

The primary focus of the Opinion is on the merits of introducing two voluntary product categories for financial products, "sustainable" and "transition". The rules for each category would have a clear objective and criteria to reduce greenwashing risks.

Financial market participants would use these simple and clear categories to enable consumers to understand the product's purpose.

However, the Opinion also covers:

• appropriate disclosures for products (outside the above two categories) to reduce greenwashing;

• ways to improve the definition of sustainable investments;

• simplifying how disclosures are presented to investors;

• technical suggestions as to which products should be in scope of the SFDR and improving disclosures on the negative impact of investments; and

• the need for consumer testing to be conducted before policy proposals to review the SFDR are put forward.

The ESAs' key recommendations to the Commission

The Opinion sets out nine main recommendations for the Commission to consider

• introducing a product classification system, based on regulatory categories and/or sustainability indicators which could help consumers navigate the broad selection of sustainable products and support the full transition to sustainable finance;

• such categories would be simple and have clear objective criteria or thresholds, identifying which category the product falls into. The ESAs suggest these categories should at least include 'sustainability' and 'transition';

• a sustainability indicator could refer to environmental and/or social sustainability, showing investors the product's sustainability features in a scale;

• proposed product categorisations and /or sustainability indicators should be consumer tested and consulted upon. If these are clear, sustainability disclosures would not need to be as detailed and extensive;

• revisiting the decision to have two parallel concepts of "sustainable investment" as defined in the SFDR and Taxonomy-aligned investment as defined in the EU Taxonomy. The ESAs believe that the Commission's priority should be on completing the EU Taxonomy and extending it to social sustainability;

• ensuring that sustainability disclosures cater to different investor needs with improved sustainability disclosures taking into account different distribution channels (including digital ones) and providing consistent information. The priority should be on essential information only for retail investors, while professional investors "may benefit from more detailed information";

• an assessment of whether other products should be included in the scope of the SFDR to ensure harmonised disclosures for both (a) currently in scope products and (b) other products that could be brought within scope;

• the possibility of having information on key adverse impact indicators for all financial products, based on a cost-benefit analysis justifying the introduction of such requirement; and

• evaluating the introduction of a framework to assess the sustainability features of government bonds.