Over the past few years, the EU has been working to attract the private investment Europe needs to finance the transition to a green and sustainable economy. A key part of this effort is the Sustainable Finance Disclosure Regulation (SFDR), which was designed to bring transparency and was one of the first elements of the EU’s sustainable finance framework to be put in place. The regulation is, however, not working entirely as intended. That is why the European Commission has launched a comprehensive assessment of the SFDR – and we will soon be asking for your feedback!

Greater transparency

The SFDR has applied since March 2021. It sets out how financial market participants must disclose sustainability information about their financial products and their investment decision process and communicate these disclosures to investors. By creating transparency, the regulation helps investors who want to put their money into companies and projects that support sustainability objectives to make informed choices. 

But while the SFDR was intended to promote transparency, in practice it is being used as a labelling scheme for financial products. This puts a lot of pressure on the regulation, creating legal uncertainty for market participants and giving rise to fears of greenwashing and mis-selling of products. In addition to this, there is room for improvement when it comes to the consistency and synergy between the SFDR and other major pieces of EU sustainable finance legislation, such as the Taxonomy Regulation. These were some of the reasons behind the announcement last December by Commissioner Mairead McGuinness of a comprehensive assessment of the SFDR. 

Public consultation

Currently, we are getting ready to launch a public consultation in September to seek feedback from stakeholders. This consultation will run for three months. Workshops with market participants and other stakeholder groups will also be organised in parallel. This outreach will kick off with a high-level roundtable with Commissioner Mairead McGuinness on 10 October. More information will be available at the launch of the consultation, so keep an eye on DG FISMA’s communication channels! 

Providing guidance 

In the meantime, we are, together with the European Supervisory Authorities, working to provide market participants with guidance and help them apply the SFDR.  

In April, the Commission published a Q&A to clarify issues raised by market participants. Notably, the Commission clarified that the SFDR allows products passively tracking Climate Transition Benchmarks and Paris-aligned Benchmarks to be deemed to have ‘sustainable investments’ (as defined in the SFDR) as their objective. A new consolidated version of all the questions and answers published by the Commission and the European Supervisory Authorities is now available. 

And, just recently, the Commission published an FAQ providing essential guidance on the interaction between the SFDR and the EU Taxonomy. It states that investments in Taxonomy-aligned ‘environmentally sustainable’ economic activities can be automatically qualified as ‘sustainable investments’ under the SFDR. 

Finally, the European Supervisory Authorities have been consulting stakeholders on a review of the Regulatory Technical Standards that accompany the SFDR. These have been in application since the beginning of 2023 and set out the details linked to the disclosure requirements market participants have to follow under the SFDR. The main aim of the review is to improve social disclosures and product information about greenhouse gas emissions reduction targets. In addition, the revision also aims to address some technical issues that have emerged since the framework was put in place. 

Read more on sustainability-related disclosure in the financial services sector