The SFDR is a framework that sets out sustainability disclosures for financial products. One of the key proposed changes is the introduction of three investment categories (Sustainable, Transition and ESG Basics), each with its own exclusion requirements. We already shared our reflections on these changes in a previous column.
The proposal by the European Parliament (EP) gives more guidance on how to interpret the different product categories, which we welcome. We particularly support the stronger best-in-class interpretation for the ESG Basics category, the additional disclosure requirements on engagement, and the higher bar for taxonomy-aligned activities. These changes make the framework more robust, but they do not address our main concern.
Our main concern is the lack of comparability between non-categorised and categorised investment products. Non-categorised investment products still do not have to disclose sustainability-related information. As long as these remain outside the reporting scope, retail investors cannot properly compare investment products. Categorised products, moreover, are put at a disadvantage, because they must report on (potential) harm while non-categorised products do not. This can easily mislead retail investors: if there is no information, they may assume there is also no harm.
The EP now proposes that non-categorised products must include a disclaimer stating that the financial product does not meet EU standards for defining sustainable financial products and protection against greenwashing. This is better than having no disclosure at all, but it still misses the main purpose of the SFDR: to improve transparency on sustainability-related information for financial products. In its current form, the SFDR improves this transparency only for part of the market, and often not in those areas where harm is most significant.
This flaw can be addressed in a straightforward way by expanding the EP’s proposal and introducing a mandatory set of principal adverse impact indicators. The proposal already states that a limited set of these indicators (with the exact criteria to be defined later in technical standards) must be disclosed by all categorised products. We welcome this, because a mandatory set of indicators will improve comparability between categorised products. However, we do not see why only categorised products should disclose this information. If the aim is real transparency and protection against greenwashing, these indicators must also be available for non-categorised products.
We therefore propose that the same set of indicators is disclosed by all investment products. This would allow retail investors to compare all financial products on the harm they cause, not just categorised products. It would create a true level playing field and would help the SFDR to deliver on its full potential.