EU Regulators Call for Changes to Landmark ESG Rulebook

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Europe’s ESG rulebook, which is seen as the benchmark for setting sustainability-disclosure requirements worldwide, keeps getting pushback from the regulators charged with enforcing it.

In an opinion to the European Commission, regulators for the markets, banking and insurance industries called Tuesday for changes to the Sustainable Finance Disclosure Regulation.

Specifically, the European Supervisory Authorities, or ESAs, want clear labels for defining insurance, pension and investment funds so that customers can better compare products being marketed as conforming with environmental, social and governance principles.

A “coherent sustainable-finance framework” is needed to protect investors, the regulators said. SFDR must go further to “enhance retail investor’s trust, confidence and participation in financing the economy,” they said.

The proposals signal another period of regulatory pressure for Europe’s financial industry. It’s struggled with SFDR since the regulation went into force three years ago to clean up greenwashing and channel investments to sustainable companies. Since then, asset managers and supervisors alike have called for revisions as the market for ESG investments has grown.

Of particular concern have been funds classified as Article 8, whose broad requirement to promote ESG factors has led to widespread concerns about misleading claims. Last month, EU market regulators imposed stringent new naming rules to curtail the practice, a measure that may force asset managers to divest as much as $40 billion of stock holdings, according to estimates from analysts at Morningstar Sustainalytics.

In their opinion to the European Commission, the ESAs called for new product categories of “sustainable” and “transition” — at a minimum — with clear objectives and criteria “to reduce greenwashing risks.” Use would initially be voluntary, though they suggested the commission consider making them mandatory. The regulators also proposed a “sustainability indicator” to “grade” financial products.

“Subject to consumer testing, such an indicator could group products according to how sustainable the investments are, while also identifying which products foster the transition,” the regulators said.

The opinion focuses on one of the more contentious questions about SFDR: What exactly constitutes a sustainable investment? The definition was left broad to allow for varied ESG strategies, but the result has been to make comparisons across products difficult. The regulators urged the commission to provide more stringent requirements.

The European Commission is currently reviewing possible changes to SFDR.