French financial supervisor AMF is calling for a major reform of the EU’s SFDR rules for sustainable finance disclosures and proposed to remove fossil fuel activities from investment funds that are classified as “dark green” Article 9.
Marie-Anne Barbat-Layani (photo), chair of the AMF, discussed the proposal with EU Commissioner Mairead McGuinness earlier this month and made clear the AMF seeks a wider reform of the Sustainable Finance Disclosure Regulation, or SFDR. “The AMF wants to make a constructive contribution to a new phase of European regulation on sustainable finance,” she said in a statement.
AMF believes that sustainable investment funds that invest in fossil fuels need to be classified as “light green” Article 8 funds. At the moment, fossil fuels are accepted as Article 9 on the condition that the firms in which the fund invests have embarked on a transition strategy. Oil giant BP and Total for example are multinationals that appear on lists of Article 9 investments.
Need to meet strict conditions
“Article 9 funds should exclude investments in fossil fuel activities that are not aligned with the European Taxonomy,” said AMF. “Investment in such activities would be possible for Article 8 products provided that they meet strict conditions that ensure that these activities are engaged in an orderly transition.”
The SFDR has been designed by the EU co-legislators and the Commission as an Environmental, Social and Governance (ESG) transparency regime for financial entities and products. The regulation requires financial market participants to publish information on their sustainability communications and practices.
Sustainable investment not defined
The SFDR does not impose minimum requirements and does not define the concept of sustainable investment. Consequently, the current Article 8 and Article 9 classification does not aim to assess the nature or extent of the manager’s commitment to sustainability.
“We note, however, that the use of this categorisation by financial market participants may be misinterpreted by savers as a guarantee that they are participating in the financing of a more sustainable European economy,” AMF said.
”It therefore seems necessary to take new steps in order to avoid this ambiguity and to better meet the expectations of savers. It is desirable that the European Commission proposes to introduce minimum criteria concerning environmental impacts for financial products categorised under Article 8 or Article 9.”
Such an initiative does not necessarily mean a reversal of the broader ambition of the transparency regime which covers all of the ESG criteria. In its English-language press release, the French supervisor said that “as a first step, and given the European sustainable finance agenda, it could be targeted at the environmental dimension.”
Environmental criteria
AMF said it would also support establishing minimum environmental criteria for the classification of products as Article 9 or Article 8. Compliance with these criteria would be subject to national supervision. “The criteria for Article 9 should continue to be more stringent than those for Article 8,” it said.
A minimum proportion of portfolio assets for Article 9 funds should consist of investments aligned with the EU’s Taxonomy. This percentage could increase over time as the European economy advances towards sustainability, it said.
Financial market participants that manage Article 8 and 9 funds should adopt a binding ESG approach in their investment decision-making process, AMF said. The EU framework for minimum criteria should identify a set of acceptable ESG approaches that can be implemented by financial players.
The AMF also proposes to introduce the concept of transition and engagement policies. It said it has identified possible avenues for a “quantitative definition of assets in transition”.