The current Implementation of the Sustainability-related Financial Disclosures Regulation (SFDR). With an assessment on how the legislative framework is working for retail investors

The Sustainability-Related Financial Disclosures Regulation (SFDR) is the centrepiece of the sustainable finance strategy for funds and other financial products. However, its provisions are too complex, do not work as intended, and interact insufficiently with provisions shaping corporate reporting, indexes, or client preferences. A revised SFRD should include more recognisable product labels or categories, enable and foster transition investments, smoothly interact with corporate reporting, and expand the scope of disclosure obligations. The purpose of this study is to inform the policy debate on sustainability disclosures under the SFDR and provide a legal assessment on possible changes to be brought to relevant legislation in order to improve the framework. Considering this general purpose, the study has the following goals: (1) To assess in a legal analysis: a) how and to what extent SFDR provisions can be deemed to ensure the quality and pertinence; b) of information on a financial product's level of sustainability, especially for retail investors; how and to what extent SFDR provisions can be deemed effective in increasing investments in financial products supporting sustainability; c) whether (and, if so, how) the SFDR can be adjusted to better accommodate the recent pivot towards transition finance; and, (2) To propose possible ways to improve the SFDR and align it better with its stated goals. The streamlining of rules, and the expansion of their scope, would derive considerable benefit from more emphasis, in parallel, on FMPs’ methodologies, technology and tools to process the information. Authorities that play a constructive role in developing such methodologies and tools may be more prescriptive in their expectations, while reducing (some) FMPs’ dependence on “infomediaries”, regulated (index and ESG Ratings providers) or not (e.g., other data providers). In conclusion, an SFDR reform seems necessary. First, current provisions should turn into actual “labels”, supported by consumer testing and market analysis. Second, SFDR disclosures should work seamlessly with other disclosure rules. Third, more widespread reporting of PAIs is needed, but calibrated between sustainable or impact products, transition products, and general products with no sustainability features. Fourth, all of this may be possible if an adequate information infrastructure, methodologies and technological tools are developed. This calls for a proactive approach by the authorities, and for flexibility of implementation. Taken together, this would incentivise the offer of such products in the EU.