Towards a SFDR Revolution

As a reminder, the SFDR regulation (EU 2019/2088) or Disclosure applicable since March 2021 aims to promote sustainable finance in Europe.

The SFDR 2.0 text that the European Commission has just published is a legislative proposal for a thorough revision of SFDR, with an evolution to a sort of label regime introducing a product categorisation system for financial products including investment funds (both AIFs and UCITS).

Creation of 3 new categories

The European Commission proposes to abandon the products listed in Articles 6/8/9 in favor of a new thematic classification. The proposed new framework shifts from a disclosure-based system to a categorisation-based regime with three new product categories under Articles 7 (Transition), 8 (ESG basics), and 9 (Sustainable) and key requirements for each category. The funds must demonstrate a contribution of at least 70% to sustainability objectives and apply enhanced PAB/CTB type exclusions¹, including new restrictions on fossil fuel expansion.

AIFs marketed exclusively to professional investors will be exempt.

Removal of certain obligations

As it stands, SFDR 2.0 removes disclosure requirements regarding principal adverse impacts at entity level (PAIs), the integration of sustainability risks into compensation policies on their websites, and the definition of sustainable investments.

Certain obligations already in place have been removed from the regulation, such as:

• Portfolio managers and financial advisors are no longer within the scope of SFDR.

• Financial market participants will no longer be subject to disclosure obligations regarding PAIs at entity level and the integration of sustainability risks into their remuneration policies published on their websites.

• The definition of “sustainable investments” under Article 2, point (17) of SFDR has been removed along with the existing principle of “do no significant harm” and the requirements of “good governance”, now incorporated through mandatory exclusions.

• Taxonomy-related disclosures will only be required for Article 7 and 9 products that pursue an environmental objective.

• Financial market participants may decide not to apply this regulation to closed-ended funds created and distributed before the SFDR application date.

Non-categorized products are permitted to voluntarily disclose sustainability information in pre-contractual documentation provided that this information remains fair, clear and not misleading (MiFID 2.0 concept).

But they cannot:

• Use information related to sustainable development in the name of the funds or in marketing communications.

• Make sustainable development a central element of pre-contractual information (it should not represent more than 10% of the description of the investment strategy)

• Or include information on sustainable development in their KIIDs.

Next steps

SFDR 2.0 will follow the usual legislative process involving negotiations between the European Parliament and the Council of Europe. Once adopted, the new regulation will enter into force 20 days after its publication in the Official Journal of the EU and is expected to apply 18 months later.

Jean-Pierre Gomez, Head of Regulatory & Public Affairs for SGSS Luxembourg.