The Dutch Authority for Financial Markets (AFM) has issued a position paper making recommendations to improve the Sustainable Finance Disclosure Regulation (SFDR). The AFM published the proposal in the context of the European Commission's ongoing consultations on the SFDR. With the position paper, the AFM aims to better align the legislation with investors' perceptions and facilitate the shift from investing to making sustainability impacts.
The importance of aasily understood and comparable information
The AFM points out that transparency is crucial for redirecting capital flows toward investments needed for the transition to a sustainable economy. The disclosure requirements of the SFDR play an important role in this, although this information is not always easy to understand and compare, especially for retail investors. For example, the distinction between Article 8 and 9 products is not clear to many investors. Based on this, the AFM believes that a careful reconsideration of the SFDR is warranted. After all, research shows that retail investors are very interested in making sustainable investments and are susceptible to being misled by unsubstantiated sustainability claims.
AFM recommendations
The AFM's recommendations therefore ensure that investors have access to clear, meaningful and reliable information about sustainability in order to be better able to make sustainable investment decisions. The AFM proposes the following changes to achieve this:
Provide a level playing field for financial products on sustainability transparency, with or without sustainability features. The AFM proposes that all financial products should report on at least a limited number of sustainability indicators so that the principal adverse impact of each product is transparent to investors. Currently, financial market participants can generally choose whether or not to include principal adverse impacts (PAI).
Introduce three sustainable product labels that investors can understand, such as “transition products,” “sustainable products,” and “sustainable impact products,” in order to connect with the expectations and goals of sustainable investors. These labels help investors understand the differences between various types of sustainable investment products. They also provide a better understanding of how impact can be made.
Link specific minimum quality and transparency requirements to each of these labels to reduce the risk of greenwashing.
Remove the current articles 8 and 9 to prevent them from falsely being used as sustainability labels.
Allow products that do not meet the quality requirements for any of the specific sustainability labels but have sustainability characteristics or objectives to still state those characteristics or objectives. These products fall into the “other products” category. Standardized disclosure requirements allow these products to be distinguished from products that do not have sustainability characteristics. However, in the interest of consumer protection, these products should not be marketed as if they carry a sustainability rating, as they do not meet any of the minimum quality requirements for the “sustainable products” categories.
Align client advice rules (MiFID and IDD) with SFDR legislative changes so that intermediaries and investors can effectively use SFDR information to select a financial product that meets their clients' sustainability preferences.
Additionally, the paper discusses challenges related to fund naming, data availability and quality, and administrative burdens associated with the proposed recommendations.
Consequences for burdens of financial market participants
In terms of burden, this means that if minimum sustainability information is required for all products, some financial market participants that do not offer sustainable products will face additional disclosure obligations compared to the current situation. On the other hand, by introducing disclosure requirements specific to certain product categories, the overall reporting requirements will focus more on the type of product and therefore be less burdensome for certain sustainable products, especially if they do not fall under any of the labels. Position recommendations by the AFM in European Commission consultations
The AFM's position paper aims to promote further discussion in the context of consultations by the European Commission for the revision of the SFDR. The recommendations provide no mandatory guidance to financial market participants regarding their SFDR obligations. On September 14, 2023, the European Commission launched both a targeted and a public consultation on the implementation and revision of the SFDR. The deadline for participation in both consultations is December 15, 2023. The European Commission will then publish a final report in the second quarter of 2024, in which, proposals for fundamental changes to the SFDR are expected.
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