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EU Regulator Advocates for Comprehensive Review of Sustainable Investment Framework
The European Securities and Markets Authority (ESMA) has recommended sweeping changes to the Sustainable Finance Disclosure Regulation (SFDR) to address concerns about greenwashing and complexity.
The current system, which categorizes funds based on their sustainability focus into Articles 8 and 9, is set to be replaced with a two-tier model. One category would align with the EU taxonomy for sustainable activities, while the other would focus on investments in transition. The latter would be assessed based on progress in reducing environmental impact and would apply less stringent sustainability criteria.
ESMA suggests expanding the EU taxonomy to include social and transitional activities to enhance transparency and comparability. Additionally, clear definitions for transition investments and new standards for transition bonds and sustainability-linked bonds are proposed.
To combat data-related issues, ESMA calls for stricter regulation of ESG data products. This includes ensuring data quality, and consistency, and reducing reliance on estimates.
These changes come as the EU Commission reviews the SFDR following criticism of its complexity. Recent data shows declining interest in Article 9 funds, which have the highest sustainability standards, while Article 8 funds, with a lower sustainability focus, have seen increased investment. However, both categories lag behind funds without a sustainability focus.
Industry experts predict a wave of fund reclassifications and rebranding as market participants adapt to the proposed changes.
The overhaul aims to simplify the regulatory landscape, improve investor understanding, and bolster the credibility of sustainable finance in the EU.
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