EU Looks To Expand Sustainable Reporting Requirement To All Funds

A survey by the European Union has caused a stir in financial and environmental circles as the questions allude to an expansion of the Sustainable Financial Disclosure Regulation from funds marketed as environmentally friendly to all financial products.

The SFDR was proposed in 2018 as a way to better regulate how fund managers present sustainable or environmentally friendly products. Those products have since become known as environmental, social, and governance funds.

The SFDR was part of a broader push to regulate how funds and businesses present their sustainable initiatives, and works in tandem with the Corporate Sustainability Reporting Directive. The European Sustainability Reporting Standards adopted on July 31, 2023 are intended to meet the reporting requirements of the SFRD and the CSRD. The ESRS go into effect on January 1, 2024, but the details are still being addressed.

The general SFDR legislation passed in 2021, with technical standards being released in 2022, effective January 1, 2023. While the SFDR have only been in effect a short time, there are already concerns that they are not being used as a way to provide better disclosure, it is being used as a “labelling scheme” as a way to market funds.

There are concerns that the current use will result in greenwashing, or the exaggeration of environmentally friendly actions by a company or a fund in an attempt to appear greener. As the demand for sustainability by companies and in funds increases, so does the risk of greenwashing as a marketing tool.

In order to address those concerns, gather opinions on the ESRS, and evaluate the impacts and cost the SFRD has on funds and businesses, the European Commission has initiated a consultation for input. The consultation is divided into two questionnaires. The first is open to the general public. The second is targeted to those with more in-depth knowledge of the SFRD and has two additional sections of questions. The consultations state the Commission wants to hear specifically from “financial practitioners, non-governmental organisations, national competent authorities, as well as professional and retail investors, on their experiences with the implementation of the SFDR.”

The final results of any changes to the SFDR are purely speculative at this point, but the consultation is a good indicator of the priorities of the Commission. The consultation is open until December 15, 2023.

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