The three European Supervisory Authorities (ESAs) proposed a joint opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR) on 18 June 2024. The opinion is comprised of a series of updates and changes to the SFDR regulation, including the introduction of new categories for financial products offered by private credit or equity funds, asset managers, insurance firms, and pension funds.

The SFDR applies to financial market participants (FMPs) and financial advisors within the European Union (EU). Therefore, the financial firms (private or public) operating in the EU should begin preparations to incorporate these proposed updates to the SFDR.

The three ESAs are European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA). 

Let's explore the updates to the SFDR as proposed by the ESAs.

What is the SFDR?

The SFDR is a European Union regulation that includes a set of rules that aim to make the sustainability profile of investment funds more comparable and better understood by investors. 

The main goal of the SFDR is to increase transparency and prevent greenwashing by requiring financial entities to disclose information on the integration of sustainability risks and the principal adverse impacts of their investment decisions and processes. 

Although there are no direct penalties for not complying with SFDR, the non-complying firms can end up being “named and shamed” by regulators.

The EMAs proposed updates to the SFDR

The new opinion by ESA suggests a coherent, sustainable finance framework that caters to both enhanced consumer protections and the green transition. The updates include: 

• the introduction of an indicator that would grade financial products, such as the sustainability rating scale for funds, as part of its review of SFDR. 

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  the inclusion of simple and clear categories for financial products. The simplification consists of two voluntary product categories: “sustainable” and “transition”. The sustainable category would include products that invest in economic activities and assets that are already environmentally or socially sustainable. The transition category would include products that invest in assets or activities that are not yet sustainable but are on their way to becoming sustainable over time. 

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  appropriate disclosures for products that fall outside the “sustainable” and “transition” categories in order to further reduce greenwashing.

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  modifications to the definition of sustainable investments that would make the key parameters under Article 2(17) of the SFDR prescriptive, rather than providing financial market participants more flexibility in how they define sustainable investments, which has led to problematic differences when attempting to create a uniform framework.

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  technical suggestions to help define which products should fall under the scope of SFDR and how to improve disclosures regarding the negative impact of investments on people and the environment. 

Next steps

The European Commission is likely to consider these recommendations made by the ESAs, but how and when they incorporate the changes remains undetermined. The ESAs state that they are ready to support the European Commission in future policy considerations on any review of the SFDR framework. 

While you’re here…

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