04 Jul 2023

SBAI Response to ESA Joint Consultation Paper - Review of SFDR Delegated Regulation

We welcome efforts to help investors make better informed investment decisions by providing them with additional information on the sustainability profile and risks of investment funds.

Our response to the Consultation Paper (JC2023 09) on the Sustainable Finance Disclosure Regulation (SFDR) focuses specifically on the calculation methodology for Principle Adverse Impacts (PAIs) and taxonomy alignment (KPIs).

We propose amendments to the methodology to ensure that the sustainable characteristics of alternative investment funds, that engage in more complex strategies by using short positions and/or derivatives, are accurately reflected in the approach.

We also provide a framework that helps explain how investors (and the SFDR) have actual impact on sustainability outcomes in the real economy. Specifically, we demonstrate that in the secondary markets, apart from voting/engagement (which the PAIs and KPIs are not concerned about), impact on future “cost of capital of issuers” is the key transmission channel. In this context, we show that derivatives and short positions play the same role as buying or selling the underlying securities in terms of influencing issuer cost of capital, and thus we argue for the recognition of said equivalence in the PAI and KPI calculations.

The consultation response also provides examples for how the currently proposed KPI/PAI methodologies provide greenwashing loopholes, introduce unnecessary complexity, and misrepresent the impact and taxonomy alignment of certain alternative investment strategies.