The legal framework surrounding the EU’s sustainable finance policies has been confusing. The Sustainable Finance Disclosure Regulation (SFDR) has been a tricky piece of policy. The law is not only confusing, it also creates situations where SFDR labeling can possibly contribute to greenwashing, which is the opposite of the law’s intended effects. Recently there have been efforts to reform the SFDR, and a big shakeup is coming. The European Securities and Markets Authority (ESMA) issued an opinion arguing that the EU Taxonomy – rather than the SFDR – should take center stage in the EU’s sustainable finance policy. The Opinion states:
“Making the EU Taxonomy the sole common reference point of the Framework would promote convergence in financial products offered in EU capital markets and facilitate comparability… However, at this stage, the Taxonomy does not cover all the economic activities that could substantially contribute to the environmental objectives. To fulfil its central role, the EU Taxonomy should be completed for all activities that can substantially contribute to environmental sustainability…
ESMA believes that the SFDR approach of defining environmental sustainability should be phased out in due course as the EU Taxonomy is being completed.”
These changes are currently only policy recommendations, but if implemented they could go a long way to cleaning up the EU’s sustainable finance system. Part of the current problem is that the line between the EU Taxonomy and SFDR is confusing. Presently, a fund can be classified as an Article 9 fund – the highest level of the SFDR – without actually being considered sustainable under the EU Taxonomy. This is because the SFDR is simply a disclosure scheme, article 9 funds are not inherently more sustainable, they are just required to disclose more sustainability information. By expanding and aligning the definitions contained in the EU taxonomy with the SFDR more clarity can be brought to investors and the quality of sustainable investments can rise.
Our members can learn more about the EU’s sustainable finance policy here.
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