European Commission advisory body outlines proposal for revamped SFDR

21/01/2025

On 17 December 2024, the Platform on Sustainable Finance (the “Platform”) – an advisory body to the European Commission (“EC”) – published a briefing note for the EC outlining its proposal for a new categorisation system for sustainable finance products under the EU Sustainable Finance Disclosure Regulation (“SFDR”).

Background

Despite only coming into effect in March 2021, the implementation of the SFDR has been widely criticised. Consequently, in December 2022, the Commissioner for Financial Services, Financial Stability and Capital Markets Union announced a comprehensive assessment of the SFDR framework.

As part of this assessment, the EC published two consultation papers in September 2023, seeking views on the implementation of the SFDR and potential improvements to its reporting framework (the “Consultations”). Following the closure of the Consultations in December 2023, the EC published a summary report of the contributions made by stakeholders in May 2024. Amongst other thing, contributors called for a simplification of the disclosure requirements and a revamp of the categorisation system for sustainable finance products (you can read more about the Consultations in our earlier briefing here).

Following the closure of the Consultations, the Platform has now published its views on developing a new categorisation system for sustainable finance products under the SFDR.

Proposed new categorisation system

The Platform recommends moving away from the current categorisation system (i.e. Article 6, 8 and 9 products – which you can read more about here) to categorising products with the following sustainability strategies:

  1. 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 (e.g. non-Taxonomy-aligned investments would need to pass Principal Adverse Impact thresholds). This category would refer to Paris-aligned benchmark exclusions;
  2. Transition: investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock‑ins, in line with the EC’s recommendations on facilitating financing for the transition to a sustainable economy. This category would refer to Climate-transition benchmark exclusions; and
  3. ESG collection: excluding significantly harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability features. This category would refer to Climate-transition benchmark exclusions.

The Platform recommends that all other products should be identified as unclassified products.

The Platform believes that these categories would allow for differentiation between products that: (1) can largely be considered sustainable through their solutions or practices in line with EU classification where it exists; (2) the transition to a net zero and an overall sustainable economy by 2050 and milestones in line with these EU goals; and (3) select or exclude sectors or companies based on ESG performance. The Platform has set out precise minimum criteria, clearly defined objectives and measurable KPIs for each of the above categories in the Annex to its briefing note.

The Platform summarised its proposed new product categories in its webinar on 21 January 2025 as follows:

It is worth noting that the Platform has not proposed an “impact” (or similar) category as the Platform recognises that there are limits to using impact as criterion for products investing in the secondary markets, mainly due to the difficulties with assigning causal links between such investments and bottom-line improvements.

Other recommendations

The Platform also recommends that the EC:

  1. evaluates whether the scope of the categorisation should go beyond the current SFDR, considering whether all products and services under sustainability preferences in the IDD/MiFID should be categorised; and
  2. develops 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.

Although the Platform’s proposals are only high-level, they should serve as a basis from which the EC can build a more detailed categorisation system.

Next steps

The EC will consider the Platform’s proposals as part of its assessment of the SFDR framework. The EC is expected to publish its initial assessment in Q2/Q3 2025.