The European Fund and Asset Management Association (EFAMA) has set out a list of recommendations for the review of the Sustainable Finance Disclosure Regulation (SFDR) 2.0, aiming to ensure product categories are investable and avoid unnecessary bureaucracy.

Policymakers have started discussions on reviewing the regime, with EFAMA calling for six ‘critical adjustments’ to the rules.

The association noted that the review began as a simplification exercise and argued that it should end as one, with three distinct product categories that are easy for an end investor to understand and a distributor to explain.

It called for a few criteria that were clear and workable with the data that currently exists, warning that every extra criterion added by member states or MEPs would be a data point that asset managers would have to source for every stock holding, a supervisor would have to check, and a distributer would have to explain.

Narrowed Corporate Sustainability Reporting Directive (CSRD) reporting from corporates meant the required data was often not available, EFAMA added.

The association said it was crucial that SFDR 2.0, its technical standards, and updated rules on sustainability preferences in MiFID and IDD were applied at the same time, or it risked further market confusion if new categories were introduced before all the new rules were in place.

On transition category exclusions in the new SFDR 2.0 framework, EFAMA called for the two carve-back conditions to be treated as alternatives, warning against the adoption of four cumulative conditions as the transition category would be “impossible to populate”.

It also called for non-EU government bonds to be allowed in the transition category, and argued that the final text should explicitly allow outperformance to be measured at portfolio level, keep the ‘proven positive track record’ route, drop the European Parliament’s extra Taxonomy-alignment disclosures, and require outperformance on just one indicator.

The European Parliament’s proposed requirement to apply and report engagement strategies at the product level should be dropped, EFAMA argued, while managers should be allowed to select the Principal Adverse Impact (PAI) indicators that best fit their product’s objectives and strategy, as long as they provide a clear justification.

Finally, the association said that ‘professional investor’ should retain its AIFMD meaning and there should be no ban on sustainability claims when a fund opts out.

“This review set out to make sustainable investing simpler for end investors, and that must be the ultimate test of the final text: three clear categories built on data companies actually disclose,” commented EFAMA director general, Tanguy van de Werve.

“The different pieces of legislation must also work together. Introducing a new product framework while retaining outdated suitability rules at the point of sale would only confuse the very investors the reform is meant to help.”

EFAMA senior regulatory policy adviser, Anyve Arakelijan, added: “The transition category is where the trilogues have the most to get right.

“If policymakers treat the rules as a rigid checklist, transition funds won't be able to invest in the very carbon-intensive companies they are meant to transform.

“Instead of driving change from the inside, strict EU hurdles will simply push these companies - and the influence over them - into the hands of foreign investors who face no such restrictions.”

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