When the European Commission first proposed a revision of its fund labelling regime, preventing greenwashing was amongst its most pressing concerns. Its proposal for a revamped Sustainable Finance Disclosure Regulation (SFDR) was published over four months ago.
As stakeholders digest the details, concerns are being raised about the new regime’s effect and the blind spots that linger in its design.
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Striking a balance
Among the key alters proposed, is the introduction of three fund labels – sustainable, transition and ESG basics. The European Sustainable Investment Forum (Eurosif), a network of European investor groups – has welcomed the shift to product categories.
The reform, the group reckons, is in the interests of European asset owners. There are, however, alters it states are necessaryed to create SFDR fit-for-purpose.
“The European Commission proposal contains some positive steps forward. However, it falls short of establishing sufficiently robust criteria and meaningful disclosures necessaryed to meet finish investors’ expectation”, Eurosif executive director Aleksandra Palinska declared in her initial response.
In a new position paper published this week, Eurosif has put forward its full set of recommfinishations. The key message from the investor network is that SFDR’s success will depfinish on finding a balance between incentivising ambition and addressing greenwashing.
Financing reduced emissions
The SFDR’s new ‘transition’ category is where this balance is hardest to strike. The EC’s proposal is to steer capital held in these funds towards companies with credible transition strategies. Crucially, the proposal falls short of defining the credibility of such plans.
Eurosif states clear definitions around credibility and strengthening guardrails around transition funds is necessary.
For instance, the group recommfinishs transition fund labels to require a minimum percentage of investments with credible asset-level transition plans. In addition, Eurosif has recommfinished building credible engagement a core requirement of transition fund labels, rather than an add-on.
While welcoming exclusions on fossil fuel expansion, the group argues exclusions must not come at the cost of reducing financing available for companies with fossil fuel legacies viewing to transition.
For instance, the exclusion of companies deriving more than 1% of revenue from hard coal and lignite Eurosif views as counterproductive.
“This approach would exclude companies with credible transition commitments but with existing coal activities from “transition” products, which is often the case, particularly in some countries that remain depfinishent on fossil fuels. Yet these companies are precisely the ones that necessary financing to support their transition”, the group states.
The way things stand, estimates suggest SFDR 2.0 transition fund labels could lead to €2.3bn of fossil fuel investments being inconsistent with the new rules. That is according to research conducted by advocacy groups Urgewald, Finanzwfinishe and Facing Finance.
Blind spot
The advocacy groups have warned that the third label – ESG basics – runs a higher risk of greenwashing.
“The revision of the SFDR could be a milestone for credible sustainable financial products. For this to succeed, however, the blind spot that the ‘ESG basics’ category represents necessarys repairing”, states Fiona Hauke, a financial regulation expert at Urgewald.
“The term ‘ESG’ clearly conveys a sustainability claim to consumers. The mandatory exclusion of fossil fuel expansion must also apply to the ESG basics category”, she adds.
Eurosif, which has welcomed the third label, has also called for additional clarifications. An ESG basics label, the group recommfinishs, must be accompanied by ‘tailored’ naming and marketing rules.
“The criteria for the ESG basics category should not result in this category becoming all encompassing”, the group warns. The unintfinished ‘all encompassing’ issue, Eurosif states, is a lesson to be learned from Article 8 funds under the current framework.
The success of Europe’s fund labelling reform will hinge on balancing credibility against ambition. Eurosif and the advocacy group positions identify key tenets of that balance – including building space for transition capital to flow where it is necessaryed whilst tightening guardrails and raising the bar on eligibility criteria.
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