The Principles for Responsible Investment (PRI) has asked the European Union to introduce sustainability reporting rules for all financial products, not just those claiming to consider environmental and social factors.
Currently, financial products sold in Europe must comply with the EU’s Sustainable Finance Disclosure Regulation (SFDR). The law essentially exempts ‘non-sustainable’ funds from detailed reporting, while putting prescriptive and costly disclosure expectations on those pursuing environmental and social objectives.
But the PRI argued that the EU should “develop a baseline of sustainability disclosures for all financial products, regardless of their sustainability claims”.
Financial institutions should submit a detailed explanation of if, and how, each product considers sustainability, and the extent to which their holdings align with the EU’s green taxonomy, it said.
As a minimum requirement, PRI wants all products to report on “a limited number” of Principle Adverse Impacts (PAIs), which are the indicators used in SFDR to quantify the potential negative impacts of a financial institution’s holdings on environmental and social objectives.
A more thorough approach to disclosures for ‘non-sustainable’ financial products would “contribute to creating a level playing field regarding sustainability reporting obligations and increase comparability across financial products in the EU,” it argued.
The suggestion was made as part of wider recommendations from the investor body in an ‘EU policy roadmap’, published today.
On the back of interviews with 103 of its signatories – 73% of which were asset managers and 22% asset owners – as well as European policymakers and members of civil society, the PRI identified six priority areas legislators should focus on after this summer’s European elections.
They include improving the rules governing transition finance, corporate governance, stewardship, investor duties, global interoperability and real-economy policy.
There is not enough time under the current European Commission and Parliament to pass new regulation, and – after five years as the global leaders – there are concerns that a swing to the right in the upcoming Parliament election will dampen the EU’s sustainable finance ambitions over the next five years.
But the Commission has already kicked-off a review of SFDR to try and fix flaws in the regulation, which has caused widespread headache for the finance sector since it was introduced in 2021.
Clémence Humeau, head of sustainability coordination and governance at AXA, and a member of the EU’s Platform on Sustainable Finance, said in a foreword to today’s recommendations that “usability issues and the sequencing of regulations and guidance have led to significant costs and difficulties for investors in interpretating and implementing the legislation”.
PRI told IPE that it would be more effective to introduce its disclosure proposals into the review of SFDR than to create a separate piece of legislation.
When asked if its signatories really wanted SFDR to include additional disclosure requirements, given that the regulation is already considered overly burdensome by many investors, PRI said that was “broad support in the market” for its proposal.
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