The Sustainable Finance Disclosure Regulation (SFDR) has promoted transparency in sustainable finance, however its use by market participants as a de facto ESG labelling regime has stretched it beyond its original intentions and not always been helpful. The current European Commission review needs to address how SFDR can provide clearer, more meaningful information for retail investors, promote transition finance, and align well with other relevant legislation. Real sustainable changes at the corporate level are urgently needed and a well-functioning regulatory framework would allow sustainable investors to contribute to this economic and technological transition more efficiently.
We propose the following solutions:
Categorisation system based on the product’s intention: Categorise financial products by their sustainability intentions using objective criteria, including a clear description of the product’s intentions, an explanation of the ESG strategies that will be followed, and the specification of credible KPIs.
Transition finance: The concept of transition finance needs to be clearly defined and integrated within SFDR. This will incentivize investments that help companies moving towards a more sustainable business model, rather than only focusing on projects or firms that are already sustainable.
Simplified product disclosures: Introduce a standard disclosure template for all financial products with sustainability claims, making information more accessible for retail investors.
Alignment with distribution regulations: For any product categories to be effective in practice, they must be understandable to retail investors. It is therefore crucial to align any changes in SFDR with the investor sustainability preferences under MiFID and IDD.
Streamlined entity-level disclosures: To avoid unnecessary duplication, the entity-level sustainability reporting within SFDR should be aligned with the Corporate Sustainability Reporting Directive (CSRD) to reduce costs and focus on providing information that truly helps decision-making.