Council agrees position on simpler transparency rules for sustainable financial products
The Council today agreed its negotiating position on an updated sustainability transparency framework for financial products sold in the EU. The objective is to ease administrative burdens and help investors better understand and compare sustainability-related financial products.
This will help better deploy investments towards sustainability, competitiveness and other strategic policy goals of the Union.
The review updates the already existing sustainable finance disclosure regulation (SFDR) which requires market participants to disclose how they integrate social, environmental and governance (ESG) sustainability risks and adverse impacts into their investment offers.
The review will improve the current rules by introducing three new categories of financial products, as well as the criteria that should be used to define them:
- sustainable: products that contribute to sustainability goals, such as investments in companies or projects already meeting high standards
- transition: products channelling investments towards companies or projects that while not yet sustainable are on a credible path
- ESG basics: other products that may integrate ESG approaches but do not meet the criteria of sustainable or transition categories
These categories would replace existing concepts in the framework which have been shown to lead to ‘greenwashing’ – cases in which companies give a false impression of their environmental impacts or benefits. At the same time, the proposed disclosure structure would help financial market participants to drastically cut down on their administrative burden.
Main amendments introduced by the Council
Overall, the Council welcomed the proposed changes to the SFDR, since the current framework needed clarity, consistency and alignment with other EU sustainable finance efforts and the expectations of markets.
The Council’s position reinforces the sustainable and transition categories by stipulating that when companies identify and disclose the principal adverse impacts of their investments on sustainability factors – one of the conditions to be included in these investment categories – they must make mandatory use of at least three indicators from a list to be provided by the European Commission to support their claims. This should allow for better comparability between financial products.
To recognise their important role and contribution in transition, the Council position clarifies that investments in companies active in the fossil fuel sector which allocate 20% of their capital expenditure to economic activities aligned with EU taxonomy (green classification) rules, and with a clear, time-bound strategy to reduce greenhouse gas emissions, may be considered for inclusion in the transition category. To enhance transparency, such investments must also be subject to a fourth mandatory indicator when assessing adverse impacts.
General-purpose issuances by public sector bodies represent a significant share of the investment universe of many financial market participants, in particular financial products in the insurance and pension sectors. Recognising the established framework of climate and sustainability commitments at EU level, which makes it possible to meaningfully assess their compatibility with sustainability objectives, the Council proposes to explicitly allow the inclusion of such issuances by Union-established bodies in the transition category under certain conditions.
Finally, to reduce administrative burdens, the Council’s mandate allows financial market participants not to apply the categorisation provisions for alternative investment funds offered exclusively to professional investors, given that such investors do not need the same level of standardised information that should be made available to retail investors.
Next steps
The negotiating position approved today is the Council’s mandate to start negotiations with the European Parliament on the updated SFDR, once the Parliament has agreed on its respective position.
Background
The SFDR has been in application since March 2021. By setting out how financial market participants have to disclose sustainability information, the framework helps investors who want to put their money into companies and projects supporting sustainability objectives to make informed choices. The SFDR is also designed to allow investors to properly assess how sustainability risks are integrated in the investment decision process.
A comprehensive review of the SFDR by the Commission has shown that the current framework results in disclosures that are too long and complex, making it difficult for investors to understand and compare the environmental or social characteristics of financial products. Moreover, the SFDR has effectively been used as a de facto labelling system, causing confusion – particularly for retail investors – and increasing the risk of greenwashing and mis-selling. As a result, the regulation has not fully met its objectives to help the EU financial sector allocate capital for Europe’s sustainable priorities.
