The European Commission is considering a revamp of the way sustainable investment products are classified, according to a document reviewed by British platform Responsible Investor. The current system, governed by the Sustainable Finance Disclosure Regulation (SFDR), categorizes these products under Article 8 and Article 9, but this could be subject to change.
Responsible Investor bases its report on a preliminary version of a questionnaire tied to a consultation process that the Commission plans to initiate soon. This consultation is set to last three months and aims to review the implementation of the SFDR.
Discussions over the last year with the industry, which argued that the SFDR framework makes it vulnerable to greenwashing allegations, and with national supervisors, which find it challenging to enforce, have opened the doors to such a review. French supervisor AMF for example has argued for the removal of the Article 6 category, which includes fossil fuels and other non-sustainable investments.
Need for more precision
According to the accompanying notes in the questionnaire, the original drafters of the SFDR did not intend for Article 8 and Article 9 to serve as labels for investment products. As a result, there’s a perceived need for a more precise categorization system at the EU level based on specific criteria. One option might be to refine the existing categories: Article 8 («light green») and Article 9 («dark green»). Alternatively, an entirely different approach could be pursued, potentially focusing on types of investment strategies and possibly eliminating terms like «sustainability characteristics» or «sustainable investments.»
Alternative classifications proposed
The document reportedly describes an alternative classification system involving four tiers, which descend in terms of sustainability:
1. Products that aim at measurable solutions for sustainability issues.
2. Products designed to meet high-quality sustainability standards.
3. Products aiming for measurable improvements in the sustainability profile of the investments.
4. Products that exclude investments with negative environmental or social impacts.
The preliminary consultation document also raises questions about the accountability requirements under SFDR. The Commission is interested in finding out if these are considered useful and whether there’s room for streamlining them with similar conditions in other regulations. Additional general questions about compliance costs are also included. Responsible Investor quotes one such query from the document: «Is the broad objective of the regulation still relevant?»
Contentious history
Since its introduction in 2021, and the enactment of its technical standards on Jan. 1, 2023, the distinction between Article 6, 8, and 9 investments has been a point of contention. Market interpretations of what constitutes a «green» or «sustainable» investment have been inconsistent, leading to occasional revaluations. Regulatory guidance from various European authorities has done little to resolve these ambiguities. For instance, Article 8 has become a catch-all category for investments that could be either green or grey, and the market has unofficially introduced a category labeled «8+.»
The Commission’s next steps in this arena will be keenly watched, given the ever-increasing importance of sustainable investments in global financial markets.
Related articles on Investment Officer Luxembourg:
- SFDR Article 8: The bar is not high
- SFDR clarity welcomed but greenwashing fears linger
- French supervisor AMF pushes for major SFDR reform