Sustainability disclosure – is all of Europe in it together?

Mikkel Bates, Regulatory Manager, dives into country specific approaches to the Sustainable Finance Disclosure Regulation (SFDR) and whether there is a greater need for consistency across borders. France and Germany currently lead the way in setting higher standards, with France recently introducing legal sanctions against greenwashing.

When version 3.1 of the European MiFID Template (EMT v3.1) was made available for all to use to report a more nuanced version of the target market for funds than version 3.0, it involved a small tweak to a single field.

Using that field, a fund can, in the jargon of the Sustainable Finance Disclosure Regulation (SFDR), be classed as an “Article 8” fund, with ESG characteristics, an “Article 9” fund, with sustainable investment as its objective, or neither.

For distribution throughout most of Europe, that’s the only change, but anyone distributing funds in France or Germany faces additional requirements.

In Germany, funds need to disclose on the EMT if they are classed as “Basic”, “ESG” or “Impact”, with additional criteria on exclusions, following the UN Principles for Responsible Investment (PRI) and avoiding violations of the UN Global Compact.

If distributing in France, funds integrating non-financial approaches need to disclose how they are aligned with the AMF Position-Recommendation DOC-2020-03 (“Information to be provided by collective investment schemes incorporating non-financial approaches”) as significantly engaging, non-significantly engaging or not meeting the standards.

France and Germany are taking a stricter line on sustainability disclosure than other EU countries, with France recently introducing sanctions against greenwashing, which could include fines and public “corrections”, and the German government is being urged to rank all financial products on sustainability on a scale of 1 to 5. This could potentially lead to additional risk disclosures down the line for products at the low end of the scale and drive a race to the top on sustainability.

The French Treasury also recently announced proposals to strengthen the requirements to qualify for its SRI label “to meet the expectations of savers and investors and to accentuate its action in terms of orienting savings towards the financing of a more sustainable economy”. At the same time, the Chairman of the AMF, the French regulator, made a speech in which he said it was key to have “an EU label for sustainable funds which would be attractive for both EU and non-EU investors. We are committed to working with our European counterparts towards that goal.” So we must hope that there will be some consistency between the national and European labels to avoid possible arbitrage.

Elsewhere, the Belgian regulator FSMA published guidelines in March on how firms there should comply with their SFDR disclosure requirements. The conclusion of law firm CMS was that the guidelines “demonstrate the ability of the Belgian regulator to take a pragmatic approach, similarly with developments in Luxembourg and Ireland (for instance), rather than a very strict approach as did the French regulator”.

Nobody is arguing against the need for a drive for greater sustainability in the financial services industry (and elsewhere) but there has to be some consistency of approach across borders, especially in a common economic and political bloc such as the EU. Levelling up may be preferable to levelling down but the playing field has to be level to help everyone to comply more easily.

Contact us to find out how FE fundinfo can help address your ESG disclosure obligations and compliance to the SFDR effective as of 10 March 2021.