SFDR (Sustainable Finance Disclosure Regulation), i.e. Regulation 2019/2088 on sustainability-related disclosures in the financial services sector was the first significant regulation adopted as a result of the Action Plan: Financing Sustainable Growth announced in 2018. It required financial institutions to report on a specific set of indicators. Although the regulation itself was adopted at the end of 2019, the indicators were defined in the so-called. Regulatory Technical Standard (RTS) issued by the European Commission only in April 2022. Almost exactly a year later, the ESAs, i.e., the European authorities supervising individual segments of the financial market, announced consultations on draft amendments to the RTS.
Why did we learn about SFDR three and a half years ago, but we will not see the first indicators calculated by institutions until June 30, 2023? And why is the list of indicators and the method of calculating them about to be changed? Because the regulator started regulating from the wrong end. First, a theoretical structure was devised for the disclosures that financial institutions should make about sustainable investment products. Then, for several years, attempts were made to fill this theoretical structure with indicators. However, it turned out that in practice, financial institutions would not be able to calculate the indicators. This is because, for example, an investment fund should calculate indicators based on data from the companies whose shares it holds. Meanwhile, companies were not required to report the necessary data, and most companies did not have to report any data on sustainable development.
It was not until the end of 2022 that the CSRD directive was adopted and we learned about the draft ESRS standards. The standards themselves (only the first set) will become law in June 2023. The ESRS standards were designed in a transparent process by a group of experts specializing in various sustainability issues. The outcome of this work had to take into account the provisions of the SFDR and RTS, as one of the main objectives of the CSRD is to finally provide financial institutions with relevant data. The draft RTS was developed behind closed doors by European supervisory authorities, without the participation of a relevant group of experts. That is why the adopted RTS contains such „gems” as an indicator of the share of investments in companies that violate the principles of the Global Compact initiative. Although this is a noble initiative, it is not a widely recognized standard of due diligence. The authors of the RTS simply mistyped one letter (instead of UNGP, i.e., UN Guiding Principles on Business and Human Rights, the abbreviation UNGC, i.e., UN Global Compact, was inserted into the RTS). Well, rules are rules, so the ESRS S1-S4 standards also had to include UNGC instead of UNGP.
The order in which regulations are created should be different:
- Determining, with the participation of a wide range of experts and through a transparent decision-making process, what information and data on sustainable development companies should report.
- Creation of appropriate regulations (directive and standards) for companies in this area
- Developing indicators with sufficiently high informational value that financial institutions could use to calculate based on data reported by companies.
- Establishing appropriate regulations for financial institutions
Unfortunately, in recent years, the regulator has been working in a different order, which has caused frustration among employees of financial institutions and companies, and gray hair among experts who have been trying to sort out this mess. However, there is a chance that within the next few months, we will achieve some kind of order between the CSRD and the SFDR, i.e., what companies have to report and what financial institutions have to calculate. However, my optimism is moderate, because Taxonomy still has a significant place in the puzzle, which is regulated both by SFDR and CSRD, and is not well suited to either of these regulations. But that's a topic for another story...
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