SFDR Categories Proposed by Platform on Sustainable Finance

17 Dec

The EU Platform on Sustainable Finance (the “Platform”) released its proposal to the EU Commission on the future of SFDR on 17 December 2024, which “strongly supports establishing a categorisation scheme”.

In response to the EU Commission’s mandate, the Platform has been working on enhancing the effectiveness of SFDR. This follows proposals from the ESA’s in June 2024 (suggesting product categories), and ESMA in July 2024 (suggesting disclosures for all funds).

Proposed Sustainability Categories

The following labels have been proposed as categories for all funds:

Sustainable

Contributions through Taxonomy-aligned Investments or Sustainable Investments with no significant harmful activities, or assets based on a more concise definition consistent with the EU Taxonomy.

Transition

Investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock-ins, in line with the European Commission's recommendations on facilitating finance for the transition to a sustainable economy.

ESG Collection

Excluding significantly harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability features.

Unclassified Products

All other products that do not meet the above definitions.

The proposed categories would have precise minimum criteria, clearly defined objectives and measurable KPIs. Products within the categories are expected to measure and disclose their sustainability performance.

The proposal is high-level and is intended to serve as a basis from which a complete and detailed categorisation scheme might be built by the EU Commission. It requires further development to define and refine thresholds based on real world testing.

Key Points and Thoughts

The highlights of the proposals and some of our thoughts:

The common categorisation scheme should address the existing fragmentation and confusion in the EU market – this is welcome as the Article 8 and 9 disclosures were never designed to be product labels but have been used as such since 2021, causing confusion around whether such products need to meet certain standards. The new proposals would address this problem. To help support this, the Platform suggests applying minimum criteria as a pre-condition for financial products to be included in a certain category.
Many of today’s Article 8 reporting funds will likely qualify for the ESG Collection classification. ESG Collection would have defined minimum criteria with a focus on environmental, social, and/or governance. This is a welcome framework; now including governance in the same approach as environmental and social features (vs. today’s Article 8 framework which has a separate approach for environmental/social characteristics vs. good governance assessments.)
Unclassified products should be required to report on taxonomy alignment, PAI GHG emissions (1), carbon footprint (2) GHG intensity (3) and UNGPs or OECD MNEs (10) – this would require reporting for current Article 6 products, which was not previously required and may result in a significant operational / resource uplift, especially as it relates to data collection for such reporting. Note that mandatory pre-contractual disclosures would not apply to Unclassified products.
The proposal acknowledges data challenges for certain PAIs for private market investors. It suggests that guidance on how these investments could be addressed would be welcomed. This could be e.g., done by providing examples of indicators usable as a proxy for indicators commonly used for listed asset classes. This is also welcome, given the challenges we have sought to address with private market clients trying to report on PAIs in the past.
The Platform states that it should be clear how products disclosing under Art. 6, but also 8 and 9 SFDR fit in it… Additional costs and resources should be kept to a minimum. They note that through market testing, it could be estimated how many Article 8 products today would be unclassified products tomorrow. It’s also possible that certain managers might consider changing a product’s sustainability feature in light of the new rules. In our opinion, the transition process to a new SFDR framework is critically important, and should be delivered with clarity, time and efficiency in mind.

The current suggested mapping from Article 6/8/9 to the new classifications is as follows:

Existing Classification	Sustainable	Transition	ESG Collection	Unclassified
Article 6	𐄂	𐄂	𐄂	✓
Article 8	✓	✓	✓	✓
Article 9	✓	✓	𐄂	𐄂

This proposal simply outlines the categorisation scheme and considerations that the Platform recommends the European Commission implement as part of the SFDR review process. It’s now up to the Commission to decide if and how to implement these recommendations, and we look forward to hearing more in 2025.

If you’d like to know more about the proposals and how it might affect your organisation or fund, get in touch. This is potentially a very big change for anyone in scope for SFDR, particularly those with Article 6 funds.