Regulators across Europe are in support of turning the Sustainable Finance Disclosure Regime (SFDR) from a disclosure regime into a labelling one.
Verena Ross, chair of the European Securities and Markets Authority (ESMA), led the calls to transform the current regulation in a bid to make it simpler for retail investors.
It follows the launch of a consultation by the European Commission last month, in which it proposed ripping up the current SFDR framework which, in its current form, has resulted in confusion across the asset management industry.
Speaking on a recent European Commission webinar, Ross said: “I am very much in favour of having some kind of label for retail investors, we need something that is sufficiently simple and this consultation is a good opportunity to look at how we can best do that.
“You can do this through specific sustainability strategies, by explaining what is transition, what is engagement and what is impact.”
She added a grading system could also be used “which a lot of consumers are already used to”.
Current SFDR classifications ‘light green’ Article 8 and ‘dark green’ Article 9 have been considered by many as a de facto labelling regime by the industry following a raft of downgrades and potential upgrades earlier this year.
“The fact Article 8 and Article 9 have been used as a labelling regime shows the appetite from the industry and investors for product categories because they are easy to communicate,” Helena Vines, commissioner of the Spanish Financial Markets Authority, said.
Patricia Dunne, director of securities and market supervision at the Central Bank of Ireland, added Articles 6, 8 and 9 have been “unintentionally” used to classify sustainable funds despite having no minimum sustainable investment requirements.
“Some are labelling their funds Article 6 when actually they are more sustainable than we have seen in funds labelling Article 8,” she said.
“It is not delivering what it should because there are very significant inconsistencies. A classification regime with some minimum standards would be a welcome addition to the framework for sustainability.”
The Commission has come under increasing pressure from the industry to change its sustainability rules amid growing fears of greenwashing. Earlier this year, it debated scrapping Article 9 altogether.
The new categories, outlined in its consultation, are set to closely mirror the Financial Conduct Authority’s (FCA) sustainability disclosures, with four classifications put forward.
It also asked for views on changes to the disclosure requirements, whether it finds the current requirements useful and whether it should consider streamlining the process.
