The European Commission has presented its proposal to revise the Sustainable Finance Disclosure Regulation (SFDR), the EU’s main tool for improving transparency in the financial sector, to the distaste of some investors.
The SFDR review proposal presents some fundamental changes.
One, it removes Article 4, eliminating entity-level disclosures from the framework.
This means financial market participants will not be required to disclose the “Principal Adverse Impacts” of their investments at firm-level or any stewardship and due diligence disclosures.
Two, it proposes, under three categories: transition (Article 7), ESG basics (Article 8), and a sustainable category (Article 9), a minimum criteria and exclusions, although these vary, with the most stringent ones for the sustainable category and more weaker ones for the ESG basics category.
It sets a minimum threshold of 70% alignment with the stated objective for the relevant category, lower than the 80% percentage foreseen by the European Securities and Markets Authority Fund Guidelines.
It also defines the transition category as excluding prohibited weapons, tobacco, companies violating international standards, and fossil fuel expansion, and requiring an additional element between a credible transition plan, science-based targets, or a sustainability engagement strategy, among others.
Finally, it removes stewardship requirements entirely from entity-level reporting and leaves it an optional engagement element for the transition category.
“This proposal is another dangerous step backwards for Europe’s sustainability agenda, effectively throwing another crucial law under the deregulation bus,” said Isabella Ritter, senior EU policy officer at responsible investment campaign group ShareAction.
“Instead of fixing the weaknesses of the current SFDR, the Commission has stripped away key safeguards that help investors and consumers understand the real-world impact of their investments,” added Ritter.
The new ‘transition’ category could have been a real game changer, said Ritter.
“Excluding fossil fuel developers is a step in the right direction and clearly acknowledges that companies expanding fossil fuels cannot be labelled as transitioning. But given its loose requirements and major gaps across the rest of the framework, the risk of greenwashing remains high unless more stringent criteria are put in place,” she added.
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