The European Commission (Commission) has grown concerned that the articles 8 and 9 disclosure requirements are being used as product labels. This wrongly implies that articles 8 and 9 guarantee a (regulated) quality standard for sustainability.
That said, the Commission recognises that this unintended consequence has occurred because of the market’s demand for a sustainable product labelling regime.
The ongoing consultation, open until 15 December 2023, provides the European Commission and industry participants, such as abrdn, an opportunity to shape this important area.
What is the consultation focused on?
The Commission is seeking views on how to revise the sustainability-related disclosure framework and whether an EU-level product categorisation system should be developed.
In relation to the latter, the consultation proposes four product categories:
- Assets that specifically offer targeted, measurable solutions to sustainability-related problems that affect people and/or the planet.
- Products aiming to meet credible sustainability standards or adhering to a specific sustainability-related theme.
- Products that exclude activities and/or investees involved in activities with negative effects on people and/or the planet.
- Products with a transition focus that aim to bring measurable improvements to the sustainability profile of the assets in which they invest.
Does this mean an end to articles 8 and 9?
The removal of articles 8 and 9 as product categories is one idea being proposed. They were never intended to be used for the purpose of labelling products and therefore may not be appropriate. The “promotion of environmental or social characteristics” (article 8) and “sustainable investments as an objective” (article 9) are inadequate descriptions. They don’t give investors an accurate reflection of the diverse environmental, social and governance (ESG) investment approaches. This is because of the vagueness around, for instance, the concept of “promotion”, and that the articles don’t adequately capture key strategies, such as transition finance.
However, removing articles 8 and 9 could make redundant the enormous amount of time, effort and energy that has gone into implementing the rules. What is more likely is an approach that leverages the useful work that has already been done and repurposes this into a framework that is suitable for use as a label. Potentially, that labelling framework could look similar to what the Financial Conduct Authority is going to propose under its Sustainability Disclosure Requirements (SDR) and Sustainable Investment labels rules by the end of this year.
What is our view?
We welcome the European Commission’s review of the SFDR. In our view, the current disclosures don’t meet the needs of either retail or professional investors. Therefore, their value is questionable to some extent. The disclosures are also biased towards public-market funds, which make it extremely challenging for other asset classes to complete. The lack of certainty on how to apply certain SFDR requirements has further increased the risk of inadvertently making inadequate or wrong statements. In general, there is too little consistency in the market and the SFDR has not managed to address this. In fact, the SFDR has potentially increased this problem by introducing complex new concepts, without providing the broad boundaries on how to apply them.
Overall, industry engagement is likely to be key to a successful future regulatory regime. As a result, we intend to respond to the consultation, and we will be gathering feedback from across the business.
What impact might this have on asset managers?
Given the focus on sustainable finance and increasing concerns over greenwashing, we are likely to see some fundamental changes to the current regime and the introduction of regulated categories. Any changes to the regulation will only be adopted once the new European Commission is in place (second half of 2024). It will have to pass the, oftentimes highly political, adoption process, which involves the European Parliament and EU Member States.
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