SFDR: New Joint Opinion from European Supervisory Authorities

On June 18, 2024, the European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a reviewed Joint Opinion with improvement suggestions on the Sustainable Finance Disclosure Regulation (SFDR). This comes as the next step in their work following two official consultations from the European Commission as well as several series of draft RTS suggestions put forward by the Authorities and a draft RTS published on December 4, 2023. You may review our blog post on that document. The latest Joint Opinion provides a structured summary of known issues along with new proposals which the ESAs have gathered throughout their work and collaborations in the past 2 years since the Regulation came in force. The ESAs put forward some interesting points around the complexity of the current Regulation which is often making it very difficult for investors to understand the requirements, in addition to their suggestion to implement a categoriзation system and a sustainability indicator with the aim to clearly underline the sustainability nature of the financial product.

This Opinion comes as a suggestion from the ESAs to the European Commission and has been published at their own initiative. As such, the Authorities’ aim is to provide a summarized report, which the Commission could consider during their extensive review of the Sustainable Finance Disclosure Regulation (SFDR), which is currently ongoing.

The primary focus falls on the introduction of a categorization system to allow for better transparency, traceability and coherence for the underlining sustainable aspects of financial products for investors in the European Union. The recommendations in this regard include:

• Categories and labelling:
  • Establishing a categoriзation system and/ or introducing a sustainability indicator as to provide clear and objective thresholds with simple criteria.
  • Proposing to include at least two categories for financial products under SFDR, which identify the products as ‘sustainability’ and ‘transition’.
  • Strongly advising on including customer testing of any new categories and/ or sustainability indicators before their official implementation.
• Disclosure templates:
  • Simplifying the sustainability disclosures to follow the introduction of the new categories with a possible diversification between more concise disclosures for retail investors and more detailed ones for professional investors.
  • Revising the current definition for “sustainable investment” as part of SFDR from one side, and “Taxonomy-aligned” as part of the EU Taxonomy in order to facilitate and enhance their conceptional use, traceability, and inter-exchangeability.
• Scope of the Regulation:
  • Broadening the scope of SFDR to potentially include e.g., structured products under a Euro Medium-Term Note (EMTN) program, so that they also benefit from standardiзed sustainability disclosure requirements and thus increase the investors’ awareness of the underlying sustainability status of such products.
  • Addressing some specific types of multi-option products (MOPs), which are currently not specified in Article 2(12) of the SFDR, and clarify their pertinence to the Regulation.
  • Establishing clear guidance for products which are not in scope of SFDR, by distinguishing between “Products that have some sustainability features but do not qualify for categories” and “Products with no sustainability features”.
  • Reviewing the application of SFDR on “government bonds” and possibly introducing a framework with at least general criteria to assess the sustainability of investments in such bonds.

Furthermore, the ESAs have included a dedicated section from the document to underline the importance of providing clear guidance on the traceability, transparency and consistency of SFDR disclosures in collaboration and interoperability with international initiatives from other jurisdictions.

In their official announcement on the publication of the Joint Opinion, the ESAs express their readiness to support the European Commission during their review of the SFDR framework. And while the Commission has officially confirmed that they have started this process, there have been no indications until this moment about the possible timelines for the publication and implementation of any updates in the Regulation.

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