SFDR criticised over fund labelling and mandatory disclosures

January 12th, 2024

Assets managers have called for a new approach to fund labelling and mandatory disclosures in the European Commission’s Sustainable Financial Disclosure Regulation (SFDR).

In response to a consultation on SFDR, several companies called for further mandatory disclosure requirements, ESG Clarity reports.

These requirements would be an addition to the principal adverse impacts (PAIs) that financial market participants currently need to disclose at the entity level under SFDR Level 2.

The consultation followed widespread criticism that some Article 8 and 9 funds, the classification for funds which meet the highest sustainability criteria, were investing in fossil fuels.

Under SFDR, to be categorised as Article 9, a fund can be actively or passively managed, but must contain sustainable investment as its objective.

Any Article 9 fund that aims to reduce carbon emissions is required to include the Paris-Aligned Benchmark (PAB) or Climate Transition Benchmark (CTB) that it is tracking.

Article 8 funds may also include carbon emissions reductions as part of their investment strategy, but investors must not be misled into thinking they are part of the fund’s objective.

The European Commission updated the SFDR guidance to clarify the requirements for Article 8 and 9 funds in April, as well as confirming that there would be no minimum requirements for fund providers.

Responses to the consultation called for SFDR to go further with mandatory disclosures to bring the requirements in line with other sustainable investment regulation such as the upcoming CSRD.

They also urged the European Commission to tighten mandatory product disclosures around the taxonomy, engagement and exclusions.

Asset manager DWS called for greater disclosures on the “quality and quantity” of stewardship engagement in its response to the consultation, which would sharply contrast with the requirements set out in the UK’s Sustainability Disclosure Requirements.