Last week marked the third anniversary of the EU’s Sustainable Finance Disclosure Regulation, noted Geoffroy Marcassoli, ESG assurance leader at PWC, who moderated an ESG reporting panel at the Association of the Luxembourg Fund Industry’s Global Asset Management Conference on Wednesday 20 March 2024.

“SFDR was a catalyst,” stated Anastasia Petraki, head of sustainability Germany, Austria and Eastern Europe at Blackrock. “It catalysed how investors and asset managers take decisions.”

“It’s been a difficult two to three years,” Oliver O’Bryan, senior sustainability office lead at Partners Group, said on the panel. “I’m not exactly blowing out the candles, but I’ll have a piece of cake.” Three years ago, SFDR was “misinterpreted as a labelling system, not a disclosure mechanism, which is what it was meant to be.” That is much less so the case today.

On the plus side, the rules have pushed “funds to treat sustainability data like they treat financial data,” observed O’Bryan. On the other hand, “we’ve only just started” to collect data points, which is not always “readily available”.

Articles, articles

Under SFDR, funds report under three classification schemes. Article 8 funds incorporate sustainability criteria into their decision-making process, while article 9 funds specifically aim to make a positive impact. Funds classified under article 6 make no sustainability claims at all.

Codrina Constantinescu, counsel at Allen & Overy, pointed to limitations with the classification scheme, for instance, problems an illiquid fund like one focused on private equity or infrastructure might have. Many of these types of funds would like to help assets in their portfolio with the transition towards sustainability. But the funds get dinged because they are “not considered sustainable from day one” and so cannot report under article 9, which arguably puts off some potential investors.

Potential SFDR reform

European regulators are currently considering a revamp of SFDR rules, including a possible switch from a classification to a labelling regime, with the aim of simplifying terminology for investors and making the categories more useful for the public.

However, changing how “complex disclosures” are presented to investors “several times during the lifetime of SFDR” carries its own risks, warned Petraki. Big shifts “might confuse investors, they might disengage or worse, they might lose trust” altogether. A certain level of clarity and consistency is needed, she said.

Given the amount of work that has gone into complying with the rules so far, “I hope” the concepts of articles 8 and 9 “will be maintained,” said Constantinescu. Instead of recreating the wheel--which would incur further costs for the industry that ultimately would be passed on to investors--she would like to see another solution bolted on top. That could, for example, be a set of “minimum standards” for different periods of a fund’s lifecycle, converting just article 9 into a label or basing a new labelling system on the EU taxonomy.

International inconsistencies

While SFDR applies in Europe, there are differing sets of sustainable investing rules globally, commented O’Bryan. Some jurisdictions’ requirements will overlap with each other and some will contradict each other, he said. It seems unlikely that there will be totally aligned international standards any time soon, if ever.

That, apparently, is how the cookie crumbles.