ESAs’ recommendations are focused around nine main pillars, namely:

  1. introduction of a new financial product classification system;
  2. use of clear and objective criteria or thresholds for the identification of the product categories;
  3. adoption of a sustainability indicator illustrating the environmental and/or social sustainability level of a product in a scale;
  4. inclusion of consumer testing and consultations to assess the various options provided for the classification and the sustainability indicator systems;
  5. adoption of a common concept of “sustainable investment” under both the SFDR and EU Taxonomy;
  6. adjustment of the sustainability disclosures required depending on the investors and the categorization of the products;
  7. extension of the SFDR scope to additional products not currently included;
  8. potential disclosure of key adverse impact indicators for all financial products, irrespectively of whether they qualify as sustainable or not; and
  9. potential introduction of a sustainability framework for government bonds.

The new product classification system proposed by the ESAs, came as a response to the use of Article 8 and Article 9 of the SFDR as a labeling regime instead of a disclosure regime, which created confusion for investors, in particular retail investors, and increased risks of greenwashing. The Opinion is suggesting going in the direction of creating (i) a “sustainable” product category for products investing in environmentally and/or socially sustainable economic activities/assets; (ii) a “transition” product category for products investing in economic activities/assets that are not yet sustainable, but working towards it. The extent of the disclosures, products naming and marketing restrictions would then depend on the qualification of the products under one of these categories or -if they do not qualify for none- the existence or not of other sustainability features.

The Opinion also suggested the introduction of a sustainability indicator in a scale to illustrate the sustainability features of a product to investors. The trustworthiness of such an indicator should be ensured by the use of clear and objective criteria for the formation of this grading scale and the categories falling under it. Whether such sustainability grading system would be used alone or in combination with the new product classification system described above, should be assessed by the EC, taking also into account the complexity and technical challenges of such an endeavor.

In its effort to provide a more coherent and clearer framework, it is proposed that the EC also reconsiders the parallel concepts of “sustainable investment” under the SFDR and the EU Taxonomy. The ESAs propose that the EU Taxonomy (which contains science-based definitions) could constitute the starting point for the measurement of sustainability performance and extend its scope to include all activities that can substantially contribute to environmental, but also social sustainability. Until such an extension of the EU Taxonomy definition is adopted, the SFDR could be amended to refer to the EU Taxonomy for disclosures on environmental sustainability and include other appropriate sustainability metrics for other non-eligible economic activities and social responsibility.

The Opinion also challenges the uniformity of pre-contractual financial product disclosures. It recommends to adjust disclosures to the audience of the document (retail or professional investors) and to the digitalization of the process. Meanwhile, the content of principle adverse impact disclosures should be made more concrete and depend on the classification of the products under the “sustainability” or “transition” category.

While the Opinion demonstrates the challenges of the current SFDR framework, the ESAs chose to follow a more moderate approach when it comes to solutions. The recommendations constitute a good base to trigger further discussions on the topic, but they did not form a detailed proposal. Therefore, it is still to be seen if and to which extent ESAs set the direction for the future amendments of SFDR.