The targeted consultation on the SFDR

The European Commission’s targeted consultation and public consultation are open until 15 December 2023 and seek views on the implementation of the SFDR.  In particular, the consultations are designed to assess how the SFDR works in practice and aims to identify potential shortcomings and issues that stakeholders have encountered regarding the concepts the SFDR establishes and the disclosures it requires. 

The consultations also address questions in relation to how the SFDR interacts with other parts of the European sustainable finance framework, whether there should be changes to the  disclosure requirements and views on the use of Articles 8 and 9 of the SFDR as “de facto product labels”.  There is a suggestion in the targeted consultation questionnaire that the European Commission is considering moving in a similar direction to the FCA in proposing a product labelling regime for all financial products as set out in the UK’s proposed Sustainability Disclosure Requirements (SDR).  Given that Articles 8 and 9 of the SFDR are currently being used as de facto product labels this might not be too surprising but this step would reverse the original intention of the SFDR as a disclosure regime rather than a labelling system.  There are concerns that the misuse of Articles 8 and 9 as product labels increases the risks of potential greenwashing.

The targeted consultation is helpful in identifying the European Commission’s concerns in relation to the legal certainty and useability of the SFDR framework and its ability to tackle greenwashing.  Given the implementation challenges that firms have reported in implementing the SFDR framework, the tenure of the questions suggests that the European Commission is potentially considering an overhaul of the SFDR rather than merely tweaking certain technical requirements as we saw in a related consultation earlier this year by the European Supervisory Authorities which proposed amendments to the regulatory technical standards supplementing the SFDR.  For further information about that consultation, please see our previous article here.

Questions of particular interest include those around the current requirements of the SFDR and the potential difficulties and costs that firms may be incurring in complying with the requirements.  For example question 1.10 requires respondents provide financial estimates for the one-off and recurring annual costs associated with complying with the SFDR requirements.  The answer to this question is split into a breakdown of internal costs incurred by financial market participants and the external services contracted to assist in complying with the requirements. 

Firms have expressed concerns about the quality of data that is available in order to fulfil ESG transparency requirements and the targeted questionnaire addresses this in question 1.12.  Firms that are using estimates to fill the data gap are asked to provide further details about the kind of estimates used in questions 1.12.4. 

Of interest in relation to the categorisation of products is question 1.13 which requests whether respondents have increased their offerings of financial products that make sustainability claims since the disclosure requirements of Articles 8 and 9 of the SFDR began to apply. 

Next steps

Responses to the targeted consultation are requested by an online questionnaire and to the public consultation via a dedicated webpage by 15 December 2023. There will be an online event to kickstart the discussions on 10 October 2023.  The consultations will be complemented by workshops and roundtables, enabling stakeholders to submit further input.  The Commission intends to adopt a report on the SFDR in Q2 2024.