SFDR 2.0 Draft Suggests Overhaul of EU ESG Disclosure Framework

Highlights

• Leaked draft proposes removal of article 8 and 9 labels and introduction of three new mandatory sustainability product categories.
• PAI reporting obligations are reconsidered due to heavy data demands on asset managers.
• The asset management sector in Europe may need to restructure product disclosures and sustainability statements once SFDR 2.0 is formally published.

The leaked draft of SFDR 2.0 has triggered a barrage of discussion in the European sustainable finance sector.

The draft, circulating shortly before the anticipated formal publication date, indicates that the EU Sustainable Finance Disclosures Regulation (SFDR) may undergo a complete makeover.

The regulation was introduced in 2021 to govern how asset managers present environmental, social, and governance (ESG) aspects in their investment processes. However, the article 8 and article 9 categories have grown into product labels, even though they were never constructed as labels. This has led to tension between market practice and supervisory expectations.

Read More: SFDR: Sustainable Finance Disclosure Regulation (EU) Explained

The draft suggests that article 8 and article 9 classifications will be removed and replaced with three new mandatory product categories under articles 7, 8, and 9 in the revised regulation. These categories would set conditions that must be met before a product can state sustainability claims.

As a result, funds currently placed under the article 8 or 9 classifications may no longer meet the new rules.

Large parts of the asset management sector in Europe may need to review product documentation, marketing language, investment screening methods, and internal controls to avoid misleading claims. This comes on the back of European authorities raising concerns about the mis-use of article 8 and 9 labels for marketing rather than for genuine sustainability practice.

Also Read: Investigation Uncovers European Green Funds’ Hidden Activities

Another major element in the SFDR regime has been the PAI (Principal Adverse Impacts) reporting framework.

PAI examines how investment decisions affect sustainability factors, including climate and social outcomes. Many firms chose not to engage with PAI owing to the high volume of technical data involved.

For firms that did follow PAI, the data burden proved heavy and costly.

The leaked draft suggests that the European Commission intends to reshape this structure in a way that reduces confusion in product categorisation and seeks consistency in ESG claims.

In turn, the asset management industry may face a period of recalibration as it prepares for official publication later in November.

See Also: 65 Impact Funds Demand New EU Investment Category

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