PensionsEurope has warned the European Union that adapting to new categories under the Sustainability Finance Disclosure Regulation (SFDR) could reduce the amount of money pension schemes have to pay their members when they retire.
The industry body for European pension funds made the comments in response to recommendations from the European Supervisory Authorities (ESAs) about how to overhaul the controversial regulation.
SFDR came into force in 2021, and was intended to provide end-investors with clear, standardised information about the environmental and social credentials of financial products.
But it has faced major implementation challenges, and the EU has committed to revisiting the rules.
PensionsEurope reiterated its support for the review in a paper, saying the framework “has led to significant implementation challenges for pension funds”.
It said any revisions should align with a commitment by European Commission president, Ursula von der Leyen, to reduce reporting requirements for companies and financial market participants (FMPs) by 25% over the next few years.
“However, the ESAs’ proposal would substantially increase the regulatory burden for IORPs,” argued the paper.
The ESAs have recommended introducing an official product labelling system into the framework, to avoid the disclosure categories – known in the market as ‘Article 8’ and ‘Article 9’ – being misused as labels.
New categories being discussed include ‘transition’ and ‘impact’.
“We would also like to stress the costs and time FMPs have already invested in complying with the existing Articles 8 and 9,” said PensionsEurope.
“Adapting to a new framework could lead to substantial costs that could negatively impact the expected income of IORP members at retirement.”
Nearly 60% of respondents to a recent SFDR assessment by the Commission said they did not think the cost of disclosing under the framework was worth the benefits generated.
“We recognise that the proposed categorisation system aims to correct the confusion caused for end-users by the current product classification under Articles 8 and 9,” said PensionsEurope.
“However, a categorisation system should be based on a thorough analysis of the regulation’s objectives. Changes to the current framework must be carefully evaluated to avoid additional complexity.”
Transition
PensionsEurope also urged the EU to focus more heavily on transition finance, saying “the current SFDR framework does not adequately recognise this approach”.
“Should the European Commission still decide to introduce a categorisation system, we support the creation of a transition category,” it said, noting that the definition of ‘transition’ would need to be harmonised across EU legislation, including the Taxonomy Regulation.
Any transition category that is introduced into SFDR should exempt government bonds, interest-rate swaps, and money market funds; and should take a gentler approach to private market investments where data is harder to find, the paper said.
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