Dutch regulator AFM publishes position paper on improving SFDR

The AFM proposes changes towards more meaningful and consumer-friendly sustainability disclosures. On 2 November 2023, the AFM published its position paper on improving SFDR. In the position paper, the AFM proposes changes to the SFDR framework particularly with a view to support (retail) investors in their sustainable investment decision-making.

What is it about?

In the context of the European Commission’s consultations on a review of SFDR that was launched on 14 September 2023, the AFM proposes certain changes to SFDR. The AFM provides a set of recommendations that should provide investors (in particular, retail investors) with more consumer-friendly and reliable sustainability information on financial products. With the position paper, the AFM aims to stimulate discussion on AFM’s proposed improvements to the SFDR and on the direction of the SFDR level 1 review more generally and invites market participants to discuss the proposed changes.

Which firms should care?

The position paper is relevant for all firms subject to SFDR, as well as for investors that are provided with sustainability disclosures pursuant to SFDR. The proposals cover all financial products subject to SFDR, so not just those with an express sustainability focus. As such, also firms that do not make available sustainability-focussed products should take note of the AFM’s proposals.

What should they know?

The implementation of the SFDR has resulted in a more structured way of providing investors with sustainability information on financial products. However, the AFM recognises that there is room for improvement with the current disclosures being too complex. Further, the AFM notes that there are problems with the categorisation of financial products as Article 8 or 9 products, such as the misuse of these categorisations as sustainability labels. Lastly, the AFM is of the view that the definition of “sustainable investments” should be more prescriptive as the current open norm prevents meaningful comparability of financial products.

Earlier studies carried out by the AFM showed that the most important objectives for retail investors in making sustainable investments are, listed in order of priority:

1. Impact (making impact by bringing about positive sustainable change with investments);
2. Ethical (investing in companies that align with investors’ personal norms and values, i.e., value-alignment); and
3. Returns (investors regard sustainability as a way of achieving a better risk-return ratio).

To better align disclosures and categorisation with these investor objectives, the AFM suggests to move away from the current distinction between products with sustainability characteristics (Article 8) and products that make sustainable investments (Article 9), and instead, to introduce three sustainable product labels which will each be subject to certain quality requirements:

• “transition products”, which invest in companies that are not yet sustainable but are moving towards becoming sustainable;
• “sustainable products”, which do not necessarily make measurable, active impact through the investment but are intended to cater to investors that want to invest in sustainable assets only; and
• “sustainable impact products”, which seek to make direct and measurable impact through investments (by financing underserved markets or companies that have a positive impact on sustainability factors), whereby the underlying assets of these products already qualify as sustainable.

The pre-contractual and periodic disclosure requirements that have to be made in respect of the financial products will follow from the categorisation of the product as “transition”, “sustainable”, or “sustainable impact”. Financial products that do not meet the quality requirements for any of these categories, will be categorised as “other” products. However, to ensure a minimum level playing field for all financial products as regards sustainability disclosures, the AFM suggests that also these “other” products should be required to make a set of standard sustainability disclosures.

When will this apply?

The Commission launched two consultations (a public and a targeted consultation) on the review of SFDR on 14 September 2023. The deadline for participating in these consultations is 15 December 2023. The Commission’s report on these consultations is expected in Q2 2024. Changes to the SFDR framework following these consultations are not expected before 2025.

Any further thoughts?

The AFM recognises that the proposed changes to the framework will come with several challenges. Firstly, both data availability and data quality remain an issue. However, the AFM notes that as these changes would not come into effect before 2025, it expects that some data challenges should be resolved. The AFM also notes the administrative burden that comes with its proposal for minimum sustainability disclosures for all financial products. Lastly, AFM recognises the importance of the alignment between SFDR and the legislation related to the distribution of sustainable products (such as MiFID and IDD).