The European Commission’s SFDR review asks whether SFDR Article 8 and Article 9 should become formal product categories or be replaced with a new set of categories altogether. It opened on 14 September 2023 with a targeted consultation for specialists and a shorter public consultation for everyone else. Nothing changes yet, but the questions go to the heart of how funds have been classified, documented and marketed since 2021, so it’s a good moment to form a view.
Why is the Commission reviewing SFDR now?
The Sustainable Finance Disclosure Regulation (SFDR) is the EU regime requiring investment managers to disclose how they handle sustainability risks and adverse impacts, with extra disclosures for funds making sustainability claims. It has applied since March 2021, and the detailed templates for pre-contractual and periodic disclosures have been mandatory since 1 January 2023. In practice the market has used Article 8 and Article 9 as if they were labels, even though the regulation was written as a disclosure regime.
The Commission’s consultation page explains that the review was announced in December 2022 to look at legal certainty, how usable the rules are, and whether they help tackle greenwashing. The consultation document asks for replies by 15 December 2023, and responses can only be submitted through the online questionnaire.
What does the SFDR review consultation cover?
The targeted questionnaire has four parts, with the first two looking back at how SFDR has worked and the last two looking forward to what it could become:
- Current requirements: how SFDR works in practice, including concepts such as sustainable investment, the cost of compliance, and whether the disclosures actually help investors.
- Interaction with other rules: how SFDR sits alongside the Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), the Benchmarks Regulation, MiFID sustainability preferences and the PRIIPs key information document (KID).
- Potential changes to disclosures: whether entity-level disclosures still belong in SFDR, and whether every product, rather than only those making sustainability claims, should disclose a standard set of sustainability information.
- A possible categorisation system: whether the EU should create formal sustainability product categories, and if so how.
Should SFDR Article 8 and Article 9 become categories?
This is the part likely to attract most attention, and the Commission sets out two broad approaches without choosing between them, saying it is only consulting on these topics at this stage.
The first approach would start again, building categories around the type of strategy and using criteria that don’t depend on today’s concepts. In that world the distinction between Article 8 and Article 9, along with ideas such as environmental or social characteristics, could disappear from the framework altogether. The second approach would build on what already exists, converting Articles 8 and 9 into formal categories and adding minimum criteria to underpin concepts such as sustainable investment and do no significant harm.
The consultation also tests four possible SFDR categories: products offering targeted, measurable solutions to sustainability problems; products meeting credible sustainability standards or following a theme; products that exclude harmful activities; and products with a transition focus, which aim to improve the sustainability profile of what they invest in. Its questions assume that any categorisation system would be voluntary, although the Commission says that assumption shouldn’t be read as its preferred policy approach.
What else could change
The Commission asks whether all financial products should carry uniform sustainability disclosures, whatever they claim, possibly including a small number of principal adverse impact indicators, Taxonomy information, exclusions and engagement. That would reverse SFDR’s current logic, where the disclosure burden falls mainly on products that make sustainability claims.
At entity level, it asks whether SFDR is the right place for firm-level disclosures, given the overlap with CSRD. It also asks about machine-readable and digital formats for disclosures, and about how sustainability claims should be handled in marketing communications and fund names.
The other moving part
The review sits alongside separate work on the detail of the rules. In April 2023 the three European Supervisory Authorities (ESAs) consulted on amendments to the SFDR Delegated Regulation, proposing new mandatory social indicators for principal adverse impacts and new disclosures on greenhouse gas emissions reduction targets.
That consultation closed on 4 July 2023 and the final report is still to come. In the meantime firms are looking at two layers of potential change: near-term adjustments to the templates and a longer-term rethink of the whole framework.
What is the SFDR review timeline?
- 10 March 2021: SFDR starts to apply
- 1 January 2023: the Delegated Regulation templates become mandatory
- 12 April to 4 July 2023: the ESAs consult on amending the Delegated Regulation
- 14 September 2023: the Commission opens its targeted and public consultations
- 15 December 2023: the consultation deadline
- Next: the Commission assesses responses, alongside workshops and roundtables, before deciding whether to propose changes
What to do now
- Map your range, so you know which products sit under Article 6, 8 and 9 and why, and can test them against both approaches.
- Respond to the consultation or brief your trade body, because the categorisation questions will shape fund names, documents and distribution for years.
- Check your data lineage, since if every product ends up disclosing a core set of indicators you’ll need those numbers for funds that report nothing today.
Whichever approach the Commission takes, sustainability claims will need to be backed by data that’s consistent across the KID, the prospectus annex, the periodic report and the website, so building that consistency now is useful preparation for any outcome.
At Kurtosys we see SFDR as a data problem before it is a document problem. When the same governed fund data feeds factsheets, regulatory documents, client reports and fund websites, a change in classification or disclosure becomes one update rather than a hunt across dozens of files. If you’re thinking about what this review means for your range, get in touch.
Sources: European Commission: targeted consultation on the implementation of SFDR, targeted consultation document, public consultation, ESAs’ joint consultation paper JC 2023 09, as at 1 October 2023.
About this article
This article reflects the position at 1 October 2023 and was checked against the primary sources available at that time. Thomas Bjerkén, our regulatory reporting and fund data specialist, joined Kurtosys after it was published and now looks after our regulatory content. SFDR has moved on since. For the latest position, see SFDR 2.0: the Council has its position, and it’s closer to the Commission than you might think.
