The European real estate investment industry has welcomed proposals from regulatory bodies to introduce ‘sustainable’ and ‘transition’ categories to the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The industry had previously emphasised to regulators that this would encourage investment in the decarbonisation of the built environment and on Wednesday the three European Supervisory Authorities (ESAs) published an opinion calling for improvements, including introducing an official product labelling system with a ‘transition’ category.
It is thought that the introduction of a transition category could make it easier for real estate funds that seek to improve the sustainability of buildings to disclose under SFDR.
At the end of last year, European real estate investor association INREV told the European Commission that SFDR’s existing Article 8 and Article 9 categories were “useful for regulating transparency and disclosure requirements and for fighting against greenwashing”, but that they were “not the best basis for formal product categories as they do not accommodate transition strategies well – particularly for real estate”.
Lonneke Löwik, CEO of INREV, told IPE Real Assets this week: “We’re very pleased with the ESA’s recommendation for two simple and clear SFDR product categories, ‘sustainable’ and ‘transition’. They reflect the arguments we’ve been making for the past two years and recognise how important it is to support sustainable investment in real estate, especially transition strategies to direct capital to retrofitting currently unsustainable buildings. We hope the categories are adopted early in the new European Commission term.”
Melville Rodrigues, head of advisory, real assets at Apex Group, said: “The ESAs’ opinion on SFDR is very welcomed, particularly in recognising – what other industry commentaries and I have been asserting – the need to ‘focus on clear, simple and concise consumer-facing information’ for financial products, including ‘sustainable’ and ‘transition’.”
The three ESAs — EBA, EIOPA and ESMA — today published a joint opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR). The ESAs call for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection, taking into account the lessons learned from the functioning of the SFDR.
The ESAs focus on ways to introduce simple and clear categories for financial products. The simplifications consist of two voluntary product categories, “sustainable” and “transition”, that financial market participants should use to ensure consumers understand the purpose of the products. The rules for the categories should have a clear objective and criteria to reduce greenwashing risks.
The ESAs also recommended introducing a way to grade financial products on sustainability and requiring disclosures for all products to reduce greenwashing. Further suggestions included simplifying the way disclosures are presented to investors, prioritising only essential information for retail investors with more detailed information potentially to be provided for professional investors, and clarifying the concept of ‘sustainable investment’, which also appears in the EU Taxonomy regulation.
Aleksandra Njagulj, managing director and global head of sustainability for real estate at DWS, said: “ESAs’ welcome opinion directly addresses and suggests solutions for some of the most discussed issues related to SFDR as it stands: unintended interpretation of Articles 8 and 9 as labels, insufficiently clear definition of sustainable investment, and, of course – lack of clear provision for assets in transition.”
Njagulj said transition was “a particularly important subject” for real estate, citing research by the Buildings Performance Institute Europe that “at least 3% deep building renovation per annum is needed to achieve Paris Agreement objectives”.
The ESAs published opinion comes after the UK announced late last year that it move ahead with its new sustainability disclosure regime (SDR) for the UK, which includes a transition category.
Alluding to this, ESAs said: “the EU framework does not work in a vacuum, and other jurisdictions are moving in the same direction of considering product categories for retail investors. If feasible, the Commission should consider efforts made by jurisdictions such as the UK, the US and recently Australia, to avoid unnecessary duplication”.
Rodrigues said this was “refreshing” and that “post-Brexit EU and UK regulators must learn from each other – and aim to achieve sustainability label and disclosure coherence between SDR and the reformed SFDR”.
He added: “There is a pressing need to rectify the SFDR shortcomings. Hopefully, the European Commission will speedily progress reforms that implement the ESAs’ recommendations, and not be inhibited by a populist greenlash.”
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