A mere eleven days ago, the European Commission released an explosive consultation on its site regarding the SFDR with its stakeholders. The 44-page document poses stark questions, which some argue are more accusatory than inquisitive, regarding the relevance and effective execution of the SFDR regulation as it has been established over the past two years, particularly the categorization of investment funds into Articles 6, 8, and 9.
Those accustomed to the typically neutral consultations issued by Brussels remain astounded. This questionnaire appears as a meticulous deconstruction of the existing SFDR framework, built by the same Brussels team. It proposes an alternative approach, suggesting other avenues and contemplating the transition from one system to another. And the response deadline for such a significant subject is notably short, set for December 15, 2023.
Why this Proposed Upheaval? Why Now? Why the Tight Response Deadlines?
It’s feasible today to assert that the answers to these questions are linked to the signing of the financial regulation cooperation agreement between the UK and the EU on June 27 of this year. This accord, achieved after three years of post-Brexit discussions, showcases a strong desire for convergence in European and British financial regulations, permitting this through a series of concrete technical measures.
Evidently, the convergence of regulations regarding sustainable finance and the broader Green Deal were central to regulatory discussions. However, to participate in the Green Deal, consistent ESG criteria between the continent and the UK must be established — the objective of the aforementioned “lightning” consultation initiated on September 14.
Act One of the convergence of financial regulations between the UK and the EU will therefore be that of the convergence of sustainable finance regulations.
The UK’s Sustainable Finance initiative was launched on April 19, 2021, nearly a year after Brussels, with the FCA defining the pursued five-point strategy from the start. Their project, ready for consultation (more validation, in reality) on October 25, 2022, is a model of proposal unlike European documents. It articulates a vision, outlines a process, and details information and protections granted to individual investors, seemingly resolving all obstacles faced by the SFDR in its formation.
It’s allowed to think that the British have capitalized on the EU’s efforts to identify the critical points of ESG regulation. This document presents a radically innovative and more operational vision of ESG than the SFDR and has been extensively approved by British professionals.
The Real Death of SFDR Dates Back to July 6, 2023
When Mairead Macguiness signed the UK-EU Memorandum of Understanding on Financial Services Cooperation, this summer on behalf of the EU, she was well aware of the success of this new approach, resolving major issues of the SFDR. Tired of constantly patching the increasingly visible flaws of this legislation, she had communicated repeatedly on social media about various “FAQs” and other “tools” available to those needing to “clarify” the SFDR. In her speech to European Parliament on July 6, 2023, she highlighted the numerous congenital problems of the SFDR, offering a lengthy description of all the practical issues hampering the implementation of the SFDR and the Taxonomy, along with proposed solutions. She underscored the possible overly binary nature of European Taxonomy and highlighted the significant problem: the SFDR/Taxonomy penalizes companies not currently meeting sustainable development standards but wishing to transition to “greener” activities.
This speech effectively served as an autopsy report of the SFDR by the European Commission. All that remained was to finalize the death certificate with a rapid, cold, and direct consultation, supplemented by an attractive proposition based on British Sustainable Finance principles. This was accomplished on September 14.
The Commissioner will hold a web conference on Monday, October 10, 2023, where it is highly likely that practical obstacles to the establishment and use of SFDR and Taxonomy will be discussed in detail. The key question remains: will she be able to convince her interlocutors that the British proposal is genuinely preferable to the SFDR for realizing the growth of sustainable finance in Europe?
To be Continued…
