What is the SFDR and why does it matter for your investments?

SFDR: Assessing the Present and Looking to the Future

Implemented on March 10, 2021, but fully effective only from January 1, 2023, it is already time to take stock of the Sustainable Finance Disclosure Regulation (SFDR).

In 2023, the European Commission announced the start of a comprehensive evaluation of the regulation and last autumn organized two public consultations, one open to all citizens and one restricted to entities involved in the application of the regulation.
Recently, the preliminary report on the results has been published.

The report highlights a scenario with both bright and dark sides.
While the majority of participants (89%) agree that enhancing transparency on sustainable investments is still relevant today, and also express agreement (94%) on the greater effectiveness of European rules compared to those set at the national level for reporting, a large majority has pointed out significant limitations that have hindered the use and effectiveness of the regulation (such as lack of data and clear interpretation of fundamental concepts).
Harsh judgments have been made about how the limitations within the regulation create applicative uncertainty (79% agree), leading to potential reputational risks (80% agree) and a threat of greenwashing and mis-selling (81% agree).
Ultimately, although SFDR was created to counteract greenwashing practices, operators feel that this regulation actually risks exacerbating such practices.

Challenges and Opportunities

Moreover, 58% have stated that the cost of reporting does not reflect the benefits.
Unclear judgments emerge regarding the usefulness of transparency at the entity level concerning remuneration policies and PAIs, while opinions are positive regarding the integration of sustainability risks.
The majority of respondents have highlighted the need to introduce simplifications, especially concerning PAIs, with a request for a greater reliance on materiality assessments of indicators compared to investment choices.

A majority of participants (56%) are in favor of transparency standards for all financial products, regardless of the presence of sustainable investments, and an additional 56% support the provision of additional reporting for sustainable products.
Currently, many see reporting costs as a discriminating factor negatively impacting financial products with sustainability choices compared to those without.
Envisaging a minimum set of information for all financial products, regardless of sustainable investments, would help eliminate this obstacle.

Enhancing Sustainability Practices

72% of respondents believe that transparency alone on investment sustainability profiles (the current logic of SFDR) is not sufficient and would be in favor of categorizing financial products, with 69% hoping for the establishment of European rules for such classification.
Another element under consultation was the possibility of basing product categorization on the current definitions of articles 8 and 9, while also foreseeing a refinement of these concepts instead of defining entirely new criteria.
Overall, there is a greater preference for this latter option, although conflicting opinions are appreciated among the various categories of respondents.