Fresh Insights from the European Supervisory Authorities: June Edition!

20th June 2024

Earlier this week, the European Supervisory Authorities (“ESAs”) published an opinion to the European Commission in the context of the comprehensive review of the Sustainable Finance Disclosure Regulation (SFDR) framework

This opinion is important as it may give an indication of what is to be expected for the future of the SFDR framework.

If the European Commission under new leadership takes the opinion on board, this will still potentially mean more consumer testing of new concepts and templates as well as another consultation, delaying any immediate changes to SFDR to – at the earliest – next year.

The ESAs acknowledged the shortcomings of SFDR towards better informing retail investors and the use by the industry of the SFDR framework as a labelling regime. With this in mind, they have issued the following recommendations and proposed actions to the European Commission:

  1. Voluntary Product Classification System: Introduce a voluntary product classification system, underpinned by clear objective criteria or thresholds; highlighting the need for a “sustainability” and “transition” category (see Annex II to the ESAs Recommendation). This would mean that products would no longer be differentiated between those promoting environmental/social characteristics and those with sustainable investment as their objective.
  2. Grading Scale of Sustainability Indicators: Designate financial products by means of a grading scale of sustainability indicators, with reference to environmental sustainability, social sustainability or both. This is to ensure that investors better understand the extent of sustainability of a financial product in terms of comparability and could be used in parallel or as an alternative to the product classification (see image below).
  3. Simplified Sustainability Disclosures: Emphasize the need for sustainability disclosures not to be detailed and extensive.
  4. Revisiting Sustainable Investment Concepts: Revisit the concept of sustainable investment vs taxonomy-aligned investment given that the concept under SFDR is principle-based, while the Taxonomy-aligned investments definition is technical and prescriptive.
  5. Completion and Extension of EU Taxonomy: Address the urgency connected with completing the EU Taxonomy and extending this to cover social sustainability.
  6. Adaptation of Sustainability Disclosures: Adapt sustainability disclosures to the relevant distribution channels, specifically digital ones.
  7. Differentiation Between Retail and Professional Investors: Distinguish between the needs of retail and professional investors by means of establishing the requirement to provide retail investors with only essential information and professional investors with more detailed information.
  8. Inclusion of Other Products in the SFDR Framework: Expand the SFDR framework to include other products.
  9. Mandating Consideration of PAIs: Subject to a cost-benefit analysis, mandate the consideration of PAIs for all financial products for at least a key set of indicators and clearly distinguish between “consideration” of PAIs (which entails the need to mitigate these) vs “providing information” on PAIs.
  10. Framework for Government Bonds: Introduce a framework specifically tailored to government bonds and the assessment of their specific sustainability features on the basis of its specificities.
  11. Role of Fund Depositaries: Clarify the role of fund depositaries in terms of control on the SFDR related disclosures.

In broad alignment with the UK SDR, the ESAs recommendation in relation to a classification system distinguishes between products that fall within a category, those that have some sustainability features but do not comply with the requirements for a specific category and those that have no sustainability features.

Next steps:

While there is no immediate action to be taken, these developments are key for the future of sustainable / ESG funds and should be monitored by all financial institutions. These also offer the opportunity to provide further comments through industry bodies or directly in the context of any related future consultations.

How can Zeidler help?  

Our global team of sustainable finance lawyers and regulatory professionals is well-versed in the latest ESG, legal, regulatory, and compliance developments impacting the asset management industry. Should you have any queries, please get in touch with us.


Elisa Forletta-Fehrenberg