Managing the transition to an economic future marked by low CO2 emissions and sustainability is one of the most urgent problems we are currently facing. In order to achieve these goals, we will need clear provisions and transparent information for investors. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) is key. The law was introduced in 2021 and regulates, among other things, how to disclose a financial product’s sustainability features. However, the current review process (SFDR review), initiated by the EU itself, has shown a significant need for improvements. The necessary changes must take retail investors into account. As with so many things, there’s an easy axiom to follow: keep it simple.
Clear categories for sustainable products
Investors must be able to understand how sustainable any given financial product is. After all, they are the ones who decide how they want to invest. That’s why we need simple, unified product categories. In our latest Position paper on the Joint ESAs Opinion on the SFDR, we propose three categories:
- Sustainable products: products designed to be sustainable as based on the EU taxonomy or the SFDR definition for sustainable investments.
- Transition products: products that invest in businesses that are transitioning to more sustainable business models.
- ESG selection products: products that take into account ESG issues and allow for broader diversification.
Sustainability indicator? There's a better solution
The European financial supervisory authorities, that is the EBA, ESMA and EIOPA – known collectively as ESAs – have proposed introducing a sustainability indicator. At first glance, this may seem like a good idea. Surely a simple scale will reduce complexity and make it easier for investors to make a decision. But in practice, this type of scale is not particularly helpful. Sustainability is simply too complicated to condense into a single number. Instead, we need clear product categories and easy-to-understand information.
Less is more: reducing reporting requirements
The current flood of information is overwhelming, particularly for retail investors. And not just when it comes to sustainable investments. They need less information overall, but the information they do receive must be both relevant and easy to understand.
We therefore propose the following:
- Significantly shorter, simpler templates for disclosing information.
- Removing the requirement to disclose information on financial products on websites.
- Doing away with the PAI statement, which does not provide much added value. Moving forward, PAI indicators should only be used for financial products.
- The number of mandatory indicators should be reduced and their explanatory power increased. The best method for doing so is to shift the focus to fewer, more informative indicators. These indicators should cover climate change mitigation, biodiversity, human rights and resource use.
This will improve transparency without adding unnecessary complexity, increasing investor confidence. A sustainability preferences questionnaire referring to these new products provides a nice well-rounded addition to these measures.
Conclusion: reduce complexity, improve guidance
The SFDR review is an opportunity to improve the design of sustainable financial products. Clear product categories, reduced reporting requirements and targeted regulations will provide better information to investors and prevent greenwashing. The Association of German Banks calls, as always, for the EU to act as a role-model, a sustainable finance pioneer. The obvious path to improvement is via simplified regulations based on actual praxis.
