European Supervisory Authorities Propose Enhancements to Sustainable Finance Disclosure Regulation

Today, the three European Supervisory Authorities (ESAs)—the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA)—published a joint Opinion on the Sustainable Finance Disclosure Regulation (SFDR). This collective assessment calls for a more coherent sustainable finance framework that supports the green transition while enhancing consumer protection, based on insights gained from the current functioning of the SFDR.

The ESAs propose the introduction of two simplified and clear product categories, "sustainable" and "transition," to help financial market participants ensure consumers easily understand the purpose of these financial products. These categories are designed with clear objectives and criteria to mitigate the risk of greenwashing, where products are misleadingly marketed as environmentally friendly.

A notable recommendation is the introduction of a sustainability indicator, which would grade financial products such as investment funds, life insurance, and pension products. This grading system aims to provide transparency and assist consumers in making informed decisions regarding the sustainability of their investments.

The Opinion also addresses several key areas for improvement:

• Appropriate Disclosures for Non-Categorized Products: Ensuring transparency and reducing greenwashing for financial products that do not fall into the "sustainable" or "transition" categories.
• Enhanced Definition of Sustainable Investments: Refining the criteria to provide a clearer understanding of what constitutes a sustainable investment.
• Simplified Disclosures for Investors: Streamlining the presentation of information to make it more accessible and comprehensible to investors.
• Technical Suggestions: Clarifying which products should fall under the SFDR's scope and improving disclosures related to the negative impacts of investments on people and the environment.
• Consumer Testing: Emphasizing the need for consumer testing before implementing any new policies, such as the proposed categorization system and sustainability indicator.

This Opinion is part of a broader review of the SFDR framework initiated by the European Commission, which includes the SFDR regulation and its Delegated Regulation. The ESAs have taken this step independently and express their readiness to support the European Commission in future policy considerations related to the SFDR framework.

The proposed changes aim to create a more transparent, consumer-friendly, and effective sustainable finance framework that can better facilitate Europe's transition to a greener economy while ensuring robust consumer protection.

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