SFDR 2.0: Pivoting In The Direction Of UK SDR? – Investment Strategy

On 14 September 2023, the European Commission published a targeted consultation questionnaire to gather feedback before proposing potentially fundamental changes to the Sustainable Finance Disclosure Regulation (SFDR). The extent of the questions asked points towards ‘SFDR 2.0’ and reflects many of the proposals under the UK’s proposed Sustainability Disclosure Requirements (SDR).

What is being discussed?

The key topics on which the Commission is seeking feedback are listed below. This may interest you : The sky isn’t the limit for MOSA: New ways of doing business in space – Military Embedded Systems.

• Changes to existing disclosures

The Commission is seeking feedback on the usefulness of existing entity-level disclosures, the cost impact of the SFDR disclosure obligations in general, whether it should impose unified product-level disclosures for all financial products offered in the EU (e.g. on certain key indicators for adverse impact) , regardless of their sustainability claims or other considerations, and on the challenges of using ESG data and the use of forecasts in meeting current disclosure obligations.

• Sustainability product categories

The Commission recognizes that while the SFDR is designed as a disclosure regime, the use of the SFDR in practice as a labeling regime (with Articles 8 and 9 used as in fact product labels) suggests that there may be demand and merit in designing explicit product categories.

The Commission seeks feedback on whether to (i) convert Articles 8 and 9 into formal product categories, while clarifying and adding criteria to support existing concepts (such as promoting environmental and social performance, sustainable investment and absence of significant harm); or (ii) dividing the categories in a different way that focuses on the type of investment strategy of the product (which can dispense with the need for existing misunderstood concepts). The categories considered in the latter approach are as follows:

• products investing in assets that specifically seek to offer targeted, measurable solutions to sustainability issues that affect people and/or the planet;




• products that aim to meet credible sustainability standards or adhere to a specific sustainability theme;




• products that exclude activities and/or invested persons involved in activities with negative effects on people and/or the planet; and




• products with a transition focus, aiming to bring measurable improvements to the sustainability profile of the assets in which they invest.

Readers may recognize similarities in product categories A, B and D with FCA’s proposed SDR product labels for ‘sustainable impact’, ‘sustainable focus’ and ‘sustainable enhancer’ respectively. The Commission is also seeking feedback on the minimum criteria for each of the labels, e.g. including taxonomy alignment, engagement strategies and exclusions.

• Naming and Marketing Rules

Although only briefly discussed in the document, the Commission is seeking feedback on additional rules regarding marketing communications and product names to ensure that information is accurate and not misleading. This may include a restriction on the use of terms such as ‘ESG’, ‘sustainable’ etc. in products that do not fit any of the proposed labels, and reserving certain terms only for certain labels (eg ‘impact’ only for category A).

What is the timing for any changes?

The deadline for feedback on the consultation is December 15, 2023and there will be conference before that deadline for further discussion and feedback on 10 October, but the Commission has not yet committed to a timetable for further reforms.

Readers may remember the European Supervisory Authorities (ESA) recently consulted on changes to SFDR Level 2 legislation (regulatory technical standards), which ended in July 2023. In practice, it is likely that changes to Level 1 and Level 2 legislation will occur in parallel as part of an overall SFDR reform.

Given the consultation timetable and the scope of Tier 1 and Tier 2 considerations, it appears that further details on SFDR 2.0 are unlikely to be available before mid-2024. This may interest you : Mboweni explains why govt won’t need to borrow to provide R39bn relief package. It is possible that the Commission will consult again on specific proposals before communication and draft of a legislative proposal.

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