SFDR: BaFin makes proposals to simplify EU disclosure requirements

On 17 July 2014, the German Federal Financial Supervisory Authority (BaFin) published an article entitled “There is a simpler way to do this“, outlining their view on the state of the Sustainable Finance Disclosure Regulation (SFDR) and how it can be potentially improved in order to be more meaningful for investors.

In its statement, the BaFin acknowledges that the SFDR creates transparency in terms of sustainability, but in practice does not help investors with their investment decisions. Although providers must now disclose what exactly sustainability means for a particular product, this information is not considered to be sufficiently meaningful for investors.

The German Federal Financial Supervisory Authority’s main recommendations for enhancing SFDR are:

• “Define sustainable investments more precisely”
  With this first point, BaFin focuses on a known discrepancy in the Sustainable Finance Disclosure Regulation, where there is no strict definition of what constitutes as a sustainable investment. Their proposal is to link the definition of “sustainable investment” directly to the existing definition in the EU Taxonomy Regulation, which provides clear requirements for what classifies an investment as environmentally sustainable. In addition, for investments not covered by the EU Taxonomy Regulation, a definite interpretation shall be provided in Article 2 (17) of the SFDR. Such a definition could also be applied to other international reference documents such as the United Nations Sustainable Development Goals (SDGs). A general use case is that all market participants would have a standard which enables them to make an informed decision.

• “Focus information on the essentials”
  BaFin’s second main proposal is to reduce the number of KPI’s disclosed under the Regulation. While the Principal Adverse Impacts (PAIs) used in the PASI Statement provide key information on how financial market participants with more than 500 employees take into account the adverse effects of their investment decisions on sustainability factors, most of these indicators often focus on the same topic, e.g., “greenhouse gas emissions“. BaFin’s suggestion is for a maximum of six KPIs covering the most important aspects of sustainability.
• “Establish easy-to-understand, real product categories”
  In the third part of its article, BaFin addresses the issue of current product categories and points to cases where the product definitions are misinterpreted by market participants. BaFin proposes new product categories that are clear and easy to understand. Their suggestions include:
  • “Sustainable product”
    BaFin proposes that this product category should apply to products that invest exclusively in economic activities that pursue an environmental and/or social objective, with exceptions allowed only for investments with a hedging or liquidity purpose.
  • “Transition product – investing in activities that drive our economy towards sustainability”
    BaFin proposes a more dynamic approach, applying strict rules to avoid greenwashing, while allowing companies that do not yet focus exclusively on ESG topics to be considered as part of the transition product category. Companies would have to provide concrete, plausible transition plans and targets to be considered as investment targets for transition products.
  • “Exclusion product – Exclude investments in certain activities, such as those that are harmful to the climate.”
    In BaFin’s view, products in this category could vary in their risk-return profile and while most products would not fit into the narrower investment universe of the other two categories – transition and sustainable – defining this third category could lead to diversification of portfolios on a broader level.
• “Enable informed decisions”
  In summary, BaFin states that objectives and improvements such as the three points above would significantly improve the overall comprehensibility and manageability of the Sustainable Finance Disclosure Regulation and would also greatly benefit the original idea of the Regulation, which is to enable investors to make informed decisions according to their own ESG preferences.

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As the European Supervisory Authorities (ESAs) have already published a draft RTS and recently a new Joint Opinion on proposed improvements to the Sustainable Finance Disclosure Regulation, the Regulatory Watch team is closely monitoring the development of the SFDR and EU Taxonomy Regulations. In doing so, we ensure that our SFDR service at cleversoft is in line with the regulatory requirements and key market trends.

However, our analysis of the draft RTS and the new Joint Opinion shows that the European Supervisory Authorities (ESAs) are currently considering expanding the existing structure of mandatory disclosures, which is rather the opposite of what BaFin recommends in terms of simplification.

We offer standardized services for the full range of all SFDR disclosures, and we invite you to explore our SFDR service which includes various modules for pre-contractual, periodic and web disclosures that extend the PASI statement. All of this can be complemented by our additional offerings for the generation and collection of EET files.

Need more details? Use the contact form on our website. Our experts will be happy to answer your questions.