The European Commission’s EU Platform on Sustainable Finance has published a briefing note setting out a proposal to establish a product categorisation scheme within the Sustainable Finance Disclosure Regulation (“SFDR”). The intention of the proposal is to address the existing fragmentation and confusion in the EU market around the current SFDR Articles 8 and 9 product categories. Whilst the proposal remains high-level, it aims to serve as a basis from which to build a complete and detailed categorisation scheme and the Platform claims to leverage the positive elements of SFDR and the broader Sustainable Finance Framework in its proposal.
Whilst the proposal is non-binding on the Commission, it is significant as an indicative direction which the Commission may pursue, as part of its Level 1 review of SFDR.
Outline of proposal
The Platform recommends categorising products with the following three sustainability strategies:
- Sustainable: products including taxonomy‑aligned investments or sustainable investments, with the remainder of investments passing the do no significant harm (“DNSH”) test;
- Transition: portfolios supporting the transition to net zero and a sustainable economy; and
- ESG collection: portfolios excluding significantly harmful investments / activities, investing in assets with better environmental and/or social criteria or applying various sustainability features.
All of the above categories must meet certain minimum exclusion criteria and a certain percentage of the portfolio must meet the ESG criteria.
The Platform recommends that all other products should be identified as “unclassified products”.
The Platform also recommends:
- considering whether all products and services under sustainability preferences in IDD/MiFID should be categorised; and
- developing a common understanding on impact investing in the EU sustainable finance framework and how it relates to the EU Taxonomy and, subsequently, determine how to integrate it in the categorisation scheme.
Detailed criteria for categories
The Platform proposes the following criteria and reporting requirements for each of the categories:
| Sustainable | Transition | ESG collection | |
| Minimum criteria | X% [to be determined by the Platform/Commission following further analysis – see bullet below table] of the product’s weighted assets:
The Platform acknowledges that the SI definition is open to different interpretations and therefore proposes strengthening the SI definition by requiring that anything already captured by the EU Taxonomy cannot be considered an SI unless it meets the Taxonomy criteria. This proposal suggests a strong move to relying on the Taxonomy and a move away from FMPs being able to set their own criteria to determine SIs. Given the lack of current Taxonomy-aligned investments, we can therefore expect only few products would be able to qualify as Sustainable. It may also be easier for social-focussed ESG products to qualify as Sustainable than environmentally-focussed ESG products, given a Social Taxonomy has not been published and is not expected in the short-term. Any other assets must not undermine the sustainability objective, i.e., they must pass the DNSH test (other than hedging and liquidity instruments) – although the DNSH test will be strengthened as set out above. FMPs must prioritise PAIs that are of relevance to the ESG strategy (e.g., environmental PAIs for an environmentally focused product). FMP may determine additional binding elements. | X% [to be determined by the Platform/Commission following further analysis – see bullet below table] of the assets and/or the portfolio are transitioning, measured with credible transition pathways or plans on portfolio and/or investment level. The binding criteria can include any or a combination of:
Any other assets must not undermine the transition objective. The proposal gives the example of measuring the other assets against relevant PAIs to ensure they do not undermine the transition objective, which suggests that FMPs will be able to determine for themselves whether the other assets undermine the transition objective (although this is not explicit). FMP may determine additional binding elements. | X% [to be determined by the Platform/Commission following further analysis – see bullet below table] of investments to adhere to one (or more than one) of the following:
Any other assets must not undermine the ESG characteristics/features. The proposal gives the example that this could be done by prioritising improvement of PAIs that reflect the ESG characteristics promoted, suggesting that FMPs will be able to determine for themselves whether other assets undermine the ESG characteristics/features (although this is not explicit). FMP may determine additional binding elements. Overall, this is the most achievable category, although many Article 6 products (e.g., those with exclusions which only have minimal impact) are unlikely to be able to qualify for this category. |
| Minimum exclusions | Minimum exclusions for all investments based on exclusions for EU Paris Aligned Benchmarks (“PABs”) though adjusted, for example, excluding companies that violate UNGP instead of UNGC, not applying exclusions to issuers of use-of-proceeds bonds financing sustainable projects provided issuers have a CapEx plan in line with the EU Green Bond Standard, etc. Exclusions to be applied to all investments except cash and derivatives used for hedging. | Minimum exclusions for all investments based on EU CTBs though adjusted. Exclusions to be applied to all investments except cash and derivatives used for hedging. | Minimum exclusions for all investments based on EU CTBs though adjusted. Exclusions to be applied to all investments except cash and derivatives used for hedging. |
| Reporting | Mandatory reporting of specified information, such as Taxonomy-alignment share, SI share, all mandatory PAIs and relevant voluntary PAIs, confirmation of PAB exclusion, etc. Some of this reporting builds on existing SFDR periodic reporting, however some appears to go further, in particular, the reporting of all mandatory PAIs at a product level. | Mandatory reporting of specified information, such as performance of selected indicators, annual GHG emission reductions against science-based targets/transition plans, Taxonomy-alignment share, (where relevant) measurement against EU climate benchmark and all environmental/social mandatory PAIs (according to whether the product has environmental/social features). As per the reporting on Sustainable products, some of this reporting builds on existing SFDR periodic reporting, however some appears to go further, in particular, the reporting of all mandatory PAIs at a product level. | Mandatory reporting of specified information, including Taxonomy-alignment share, all environmental mandatory PAIs for products with environmental features and all social mandatory PAIs for products with social features. As stated in the left-hand columns, reporting of the performance of PAIs at a portfolio level will represent an uplift compared to current SFDR product-level reporting. |
- Thresholds of investments to meet the minimum criteria: Significantly, the Platform does not recommend any actual thresholds for the percentage of investments which must meet the minimum criteria. Instead, the Platform has recommended that further work is carried out on the impact of different thresholds on SFDR products, taking into account factors such as how much flexibility is necessary to manage a portfolio, the available data for different activities/regions/company sizes, etc. Helpfully, the Platform recommends “identifying approaches to address different asset classes, investment strategies and types of products”, which suggests that different thresholds could apply to different products.
- Treatment of funds of funds: The Platform states that funds of funds are eligible for any of the categories, however they are likely to be most suited to the ESG Collection category.
- Reporting by unclassified products: The Platform recommends that unclassified products (i.e., those without any sustainability features or with sustainability features which do not meet the criteria for the categories) are still required to report on Taxonomy-alignment and PAI GHG emissions. This will be an uplift for some funds which do not have any ESG characteristics and are not currently required to make periodic fund-level ESG disclosures.
Implementation and comparison to SFDR categories
The Platform proposes that as part of implementation, grandfathering and/or transition rules will need to be considered. Generally, the Platform considers that existing products (without changing their sustainability features) could be allocated to the categories as follows:
| Working title to differentiate | Sustainable | Transition | ESG collection | Unclassified |
| So-called Article 6 | No | No | No | Yes |
| Article 8 | Yes | Yes | Yes | Yes |
| Article 9 | Yes | (Yes) | No | No |
| Article 9 tracking Climate Benchmark | (Yes) | Yes | No | No |
The Platform acknowledges that there may be a need to adjust categories or the pertinent indicators and minimum criteria over time in light of scientific advancements but holds the view that the need to modify the categories themselves should be minimal.
Proposed changes to sustainability preferences regime under MiFID II
Currently, MiFID II contains a detailed regime for asset managers/wealth managers to gather sustainability preferences from investors and requires them only to recommend products which match those sustainability preferences. The Platform outlines various challenges with the current regime, including that investors are not generally interested in expressing preferences on specific minimum proportions of Taxonomy-alignment/SIs.
The Platform therefore recommends amending the sustainability preferences regime such that:
- investors are no longer questionned about specific indicators (e.g., exact levels of Taxonomy-alignment);
- instead, investors are asked more thematic general questions to establish their sustainability preferences, e.g., whether their investment should cause a measurable positive outcome, not invest in activities/assets that are harmful, invest in activities that can already be considered sustainable, etc; and
- asset managers/wealth managers should then align their answers with the relevant categories as set out above (i.e., Sustainable, Transition, etc.).
Disclosure and naming
The Platform’s proposal does not contain significant detail on disclosure and naming requirements, suggesting that it only proposes minimal changes to the current SFDR disclosure regime. The Platform has recommended:
- category names should only be used by products actually qualifying for the categories;
- products qualifying for the categories will be subject to mandatory pre-contractual disclosures and periodic reporting;
- unclassified products will not be subject to mandatory pre-contractual disclosures, although they will be subject to certain mandatory periodic reporting; and
- terms clearly related to one specific category should only be allowed to be used by products qualifying for this category.
The Platform on Sustainable Finance will present the proposal in a webinar on Tuesday 21 January 2025 from 13:00 to 14:00 CET.
The press release published on 17 December 2024 is available here.
/Passle/5f6c57568cb62a0d7c9eadee/SearchServiceImages/2024-06-06-14-48-00-928-6661cc20f004a5b0a4fc0453.jpg)
/Passle/5f6c57568cb62a0d7c9eadee/SearchServiceImages/2024-12-23-17-33-19-770-67699edf237b4a42b39b4618.jpg)
/Passle/5f6c57568cb62a0d7c9eadee/SearchServiceImages/2024-12-23-14-37-37-335-676975b1237b4a42b39af534.jpg)
/Passle/5f6c57568cb62a0d7c9eadee/SearchServiceImages/2024-12-23-13-15-37-955-67696279af5165a8c2b55a99.jpg)
/Passle/5f6c57568cb62a0d7c9eadee/SearchServiceImages/2024-12-18-12-10-15-768-6762bba7664f914855308d72.jpg)