The European Commission is set to launch a consultation that may see the Article 8 and 9 labels being scrapped under its SFDR regime.
The commission plans to evaluate market views on the implementation of SFDR and its integration with other components of the European sustainable finance framework in an effort to improve it.
This will include the application of Article 8 and 9 as disclosure labels, which were not their original intended purpose, according to draft documents seen by Responsible Investor.
Instead, the commission will seek views on the merits of developing a "more precise" categorisation system, either by building on the categories and their distinctions or taking a new approach.
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"In such a scenario, concepts such as sustainability characteristics or sustainable investment and the distinction between Articles 8 and 9 of SFDR may disappear altogether from the transparency framework," the draft documents said.
The four potential new categories suggested by the commission to replace Articles 8 and 9 mostly match those proposed by the FCA in its own labelling regime.
Sustainability Disclosure Requirements, due to launch in the UK later this year, will see three levels ascribed to funds, namely sustainable focus, sustainable improvers and sustainable impact.
However, the commission also proposed a category covering funds which exclude activities with negative environmental or social effects. This had been considered by the FCA in its first consultation, labelling it ‘responsible', but abandoned it following feedback.
Confusion around the ‘light green' Article 8 and ‘dark green' Article 9 classifications led to a wave of downgrades for funds at the end of last year, with 307 being downgraded from Article 9 to Article 8 in Q4 2022, compared to just 14 in Q1 2023.
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The consultation is expected to begin as soon as this week and will run for three months, industry insiders told Responsible Investor.
Disclosure requirements will also be considered under the consultation, with the commission asking whether entity-level disclosure requirements for financial market participants are useful.
Furthermore, the consultation asks whether SFDR should be the place to include entity-level disclosures and if there was room to streamline sustainability-related entity level requirements across various pieces of legislation.
The usefulness of uniform disclosure requirements is being considered to prevent a greater burden on products considering sustainability, while also making it easier for investors to understand all products' sustainability performance.
