Since the launch of the Sustainable Finance Disclosure Regulation (SFDR) in 2020, the European Supervisory Authorities (ESAs) have been responsible in drafting the SFDR and Taxonomy delegated regulations. Two weeks ago, on 18 June 2024, the ESAs published their new vision for SFDR via a “Joint Opinion”. In the document they offer general recommendations to the European Commission and some technical suggestions for the next SFDR review.

The ESAs recognize that the SFDR framework can be improved. They seem to agree that the disclosures are complex and difficult for retail investors to understand, as confirmed by consumer testing. While SFDR aims to enhance transparency regarding sustainability with the introduction of two disclosure regimes (after all the “D” in SFDR stands for “Disclosure”), financial market participants have used the labels 'Article 8' and 'Article 9' as marketing tools. This creates risks of greenwashing and mis-selling.

To reduce a possible SFDR misuse, the Joint Opinion proposes a categorization system simplifying disclosures for retail investors. The proposed categories would replace the current SFDR Articles 8 and 9 classifications. The ESAs introduce 4 categories: (1) Sustainable products, (2) Transition product, (3) Products with some sustainability features, and (4) Products with No Sustainability Features.

The ESAs also propose, in line with the summary risk indicator (SRI) in the PRIIP KID or the “EPC” for buildings, a sustainability indicator illustrating to investors the sustainability features of a product on a scale using colours or letters.

The Joint Opinion suggests revising the 'sustainable investment' definition (i.e., the famous art 2(17) definition). The current definition is principle-based and gives too much flexibility to financial market participants. In addition, consumer testing shows many readers don’t understand the difference between concepts of ‘taxonomy-aligned’ and ‘sustainable’ investments.

Finally, the Joint Opinion discusses expanding SFDR's scope, simplifying product disclosures (precontractual, periodic and website), and improving transparency of adverse sustainability impacts at the financial product level.