Around SRI, there is a great need for simple product classifications, both among retail investors and institutional investors. The European Commission concluded that the Sustainable Finance Disclosure Regulation (SFDR) does not meet this need, so a revision is in the pipeline. The goal? Clarity on sustainability and preventing greenwashing.
At the recent AFME European Sustainable Finance Conference in Amsterdam, Investment Officer spoke to both Helena Viňes Fiestas, chair of the EU Platform on Sustainable Finance, and Raoul Köhler, Sustainable Finance Coordinator at Dutch supervisor AFM. The AFM published proposals for improvements to the SFDR in a position paper late last year.
Köhler: “You often see that with new regulations, it always remains to be seen what it does in practice. A lot has been set in motion by the SFDR, but there is certainly room for improvement. For instance, it appears that there is a need for easy classification or something like a label, while that was emphatically never the intention of these regulations.”
Thesis 1
The number of truly “green” products will soon be reduced again with a revision of SFDR.
Helena Vines FiestasViňes (pictured): “It is possible that we will see an effect of two steps forward and one step back, especially in the beginning. But personally I don’t think that’s bad, in the end better products remain.”
Köhler: “SFDR is all about transparency. So if the number of green products goes down, that would be a fair reflection of reality. But implementing a revision is going to take years, so by then the range of reliable, truly green products may well be larger.”
Thesis 2
It is fairer if unsustainable financial products also have a heavier reporting requirement.
Köhler: “Yes. First of all because of the level playing field for all products. At the AFM, we are not in favour of a maximum reporting obligation for all funds, but we do advocate a minimum obligation. Think about the main negative impact indicators: emissions emissions, human rights, that kind of thing. This also reduces the risk of what we call ‘greenhushing’. Customers are entitled to that information, so they can make the right choice with an understanding of the impact of their investments; positive or negative.”
Thesis 3
The categories transition, sustainable and sustainable impact proposed by the AFM are just as confusing as now the “labels” 8 and 9.
Viňes: “I understand the desire for a transition category, but I would stress that it takes more than a transition plan to meet it. Capex alignment, i.e. understanding a company’s capital expenditure, is essential and any exclusion should be based on that, along with carbon reduction and targets. At the EU Platform on Sustainable Finance, we are working on what such a transition plan should look like in practice.”
Köhler: “The AFM proposal is not a replacement for labels, as Articles 8 and 9 are not labels now either. That remains important to emphasise. But we see the need for easily understandable classifications. Ideally, you meet that with categories that can act as such. We do advocate testing new designations with consumers or customers first. It is better to focus on their perception than existing market practice.”
Thesis 4
There is still too little sustainability data available to properly implement the SFDR in practice, even in a new set-up.
Köhler: “When the renewed version of the SFDR eventually goes into effect, the data challenge will probably not disappear, but hopefully it will be reduced. Improvements are already underway and will continue in the coming years is the expectation.”
Thesis 5
Without a uniform European definition of sustainability, SFDR is doomed even in the second round. The same goes for impact.
Viňes: “It is always interesting to see how the industry asks for some things and then starts complaining when the regulations arrive. I think what we have now is enough, but we can perfect it. Once you start implementing, you see what can be improved and you can start fine-tuning.”
Köhler: “The term sustainability is a catch-all of many different things. We therefore advocate close alignment with the taxonomy. That is the only European shared definition of sustainability that is tighter. But you will always keep diversity in what is meant by sustainable, so it is important to agree on what at least cannot be.”
Besides an improved SFDR, what else is on the EU Platform on Sustainable Finance’s list?
Viňes: “I would like to have a “social” taxonomy in the future. But I think the European Commission is right now to focus on the Green Taxonomy: first make sure it works and learn from what is not going well. And climate change is fundamentally a social problem, so it’s good that the focus is there now.”
“We ourselves have just published a report on capital flows towards sustainable investments and the methodology to monitor them. Then we can see which money flows to which economic activities, with which financial instruments or products. That helps us work and steer in a more targeted way. We also look with interest at the Netherlands in this respect, because of your large asset owners such as pension funds and insurers.”
In its position paper on the SFDR, the AFM makes proposals to lift the current Article 8 or 9 categorisation, with one set of transparency obligations for all products that claim to do something with sustainability. In addition, the sustainability labels transition, sustainable and sustainable impact are introduced. It is also proposed that all products should report on at least some sustainability indicators, so that the reporting burden is more fairly distributed. Incidentally, it will take at least another two - and more likely four - years for SFDR 2.0 to become a reality.
This article originally appeared in Dutch on InvestmentOfficer.nl.