The Netherlands-based financial markets regulator, the Netherlands Authority for the Financial Markets (AFM), has announced the publication of a position paper on proposed reforms to the EU’s Sustainable Finance Disclosure Regulation (SFDR), including recommendations to extend the Article 8 and 9 classification categories from the regulations. instead of a new labeling regime for sustainable investments, and to require all financial products – even those without sustainability features – to provide some sustainability-related information.
According to the AFM, the proposals are aimed at making the SFDR regulations more meaningful for investors and facilitating capital flows towards investments with sustainable impact.
The AFM’s position paper has been launched in light of the ongoing review of the SFDR framework by the European Commission.
The EU SFDR is part of the EU Action Plan for Financing Sustainable Growth. The Regulation aims to establish harmonized rules for financial market participants, including investors and advisors, on transparency regarding the integration of sustainability risks and the consideration of negative sustainability impacts in their processes and the provision of sustainability-related information regarding financial products.
The regulation includes classification levels for sustainability-oriented investment funds, including ‘Article 8’ funds that ‘promote environmental or social characteristics or a combination of those characteristics’, and the stricter ‘Article 9’ funds, ‘which have sustainable investments as their objective to have. objectively.”
In September 2023, the Commission launched a consultation focused on the SFDR, aimed at assessing the use and usability of the framework. One of the issues discussed in the document was that although the SFDR was designed as a disclosure regime, it is often used as a labeling scheme instead, with ‘Article 8’ and ‘Article 9’ being de facto used as ESG investment labels .
In response to this concern, the AFM proposes to delete the Article 8 and 9 classifications, noting that the market practice of using the categorization as a labeling scheme “demonstrates a clear desire for consumer-friendly sustainability product classifications.”
To meet this need, the AFM recommends introducing labels for sustainable investment products, with proposed categories such as ‘Transition products’, investing in companies that are not yet sustainable, but intend to become so; “Sustainable products”, which do not necessarily have a measurable, active impact through the investment, but are aimed at investors who only want to invest in sustainable assets, and; “Sustainable impact products”, which aim to make direct and measurable impact through investments and only invest in underlying assets that already qualify as sustainable. The AFM notes the scarcity of products that fit into this last category of sustainable impact and said that these products “would be very suitable for investors who prefer a positive sustainability impact over returns.”
The AFM added that products using any of the above-mentioned sustainability labels would have to meet minimum quality requirements and that each category would be subject to a specific set of disclosure requirements.
The AFM position paper also proposes that “all financial products should provide a minimum of disclosures on the sustainability impact”, including those without sustainability features, including sustainability indicators that allow investors to assess the negative impact of their investments and to assess the impact of different products. to compare. . Proposed negative impact indicators for all financial products included greenhouse gas emissions, biodiversity, human rights and labor rights.
click here to gain access to the AFM position paper.