The European Securities and Markets Authority (ESMA) has developed new obligations for product disclosures under the Sustainable Finance Disclosure Regulation (SFDR) amid market concerns the current Article 8 and 9 categories could lead to an increase in greenwashing.

ESMA published a final draft of amendments for SFDR last Friday in a bid to finalise the framework to facilitate sustainable investments through the European Union’s taxonomy. 

As part of the proposals, the European watchdog said two new SFDR product categories should be created for funds that have an environmental objective. 

Article 8, which classifies products that promote environmental, social and governance (ESG) characteristics, will create a new subset for products that “make sustainable investments with an environmental objective”. 

In addition, Article 9 will also be split into a subset for products that have an environmental objective. 

Under the new requirements, Article 9 products will be required to report on their environmental objective to highlight how they have impacted the environment.  

Article 8 products with the new environmental objective will face pre-contractual and periodic product disclosures. 

ESMA said the new disclosure standards will take effect from June 2022. 

The changes had been planned to take effect in January but in July the European Commission delayed the second phase of SFDR by six months to ensure all regulatory standards will be applied in a single delegated act. 

To meet the new requirements, firms will be required to include a “graphical representation” of their key performance indicators (KPI) as proposed in their pre-contractual disclosure documents. 

In addition, “narrative disclosures” will also need to be produced including a breakdown of the environmental objectives they are invested in and whether the activities are “enabling or transitional”. 

Firms will also be required to calculate their KPIs in two ways, firstly including all the investments in the financial product and secondly, one excluding assets such as sovereign debt.  

ESMA said this was to ensure “transparency and comparability” and enable investors to assess how much of the investment is aligned with the taxonomy.  

The Article 8 threshold has come under fire due to its “vague” definition leading to market concerns the directive could increase the risk of greenwashing. 

Speaking at the FundForum conference last week, Sandro Pierri, CEO of BNP Paribas Asset Management, said ambiguities in the EU’s SFDR could create “confusion” for investors.