Latest Updates in Sustainable Finance Product Categorisation

In light of the European Commission’s recent public consultation, the Platform on Sustainable Finance (referred to as the “Platform”) has put forward a detailed briefing note to the European Commission. This document introduces a structured approach to classifying sustainable finance products, aiming to foster uniformity and clarity within the financial sector.

Addressing Key SFDR Disclosure Issues

The proposed categorisation framework seeks to address persistent issues within the Sustainable Finance Disclosure Regulation (“SFDR”). These include variations in interpretation and implementation of disclosure requirements, which often stem from differences among national labelling systems and the approaches of auditors, National Competent Authorities (“NCAs”), and legal advisors. By mitigating these inconsistencies, the framework aspires to streamline investment processes and promote sustainable growth throughout the EU.

The Role of the Platform on Sustainable Finance

As an advisory body to the European Commission, the Platform operates under the Commission’s horizontal rules for expert groups. It is important to note that the briefing reflects the collective perspective of the Platform members and does not represent an official stance of the European Commission or the European Supervisory Authorities (ESAs). (“ESAs”).

Proposed Categories

The Platform’s recommendations outline three key categories for sustainable finance products:

1. Sustainable: These focus on investments aligned with the EU Taxonomy or other Sustainable Investments that do not involve significant harmful activities.
2. Transition: Designed to support the shift toward a net-zero, sustainable economy, these investments aim to avoid carbon lock-ins and align with EU goals for sustainability transitions.
3. ESG Collection: These prioritise assets with strong environmental or social characteristics, excluding those with significant adverse impacts or harmful activities.

Products that fall outside these categories would be designated as “unclassified.” Such investments must include clear pre-contractual disclosures detailing any sustainability-related features. Furthermore, unclassified products must report on:

• Taxonomy alignment (Revenue and CapEx).
• Principal Adverse Impact (“PAI”) indicators, such as GHG emissions, carbon footprint, and intensity.

Aligning Products with Investor Preferences

The proposed framework emphasises aligning products with investors’ sustainability preferences, supported by transparent and mandatory disclosure practices.

Minimum Standards and Metrics

Each category will adhere to a set of minimum criteria that all included products must satisfy. These standards encompass predefined sustainability objectives and binding elements backed by specific performance metrics. Key considerations include:

• Aligning existing products with the framework’s initial implementation.
• Encouraging ambitious sustainability goals without compromising practicality.

Metrics such as Taxonomy-alignment and sustainable investment indicators will inform pre-contractual and ongoing reporting, ensuring investor confidence and accountability.

Scope and recommendations

• Scope

The Platform recommends extending the categorisation framework to encompass sustainability preferences under MiFID and IDD regulations.

• Impact Investing

Additionally, the Platform calls for a unified understanding of impact investing is recommended to better integrate it into the EU’s sustainable finance framework.

• Refining Sustainability Definitions

The Platform envisions developing clearer definitions of “positive contribution,” particularly for social and environmental objectives, is necessary. This includes aligning standards such as “Do no significant harm” (“DNSH”) with international frameworks like the Organisation for Economic Co-operation and Development (“OECD”) Guidelines and UN Guiding Principles.

• Aligning with Client Sustainability Preferences

Only clients without defined sustainability preferences should be offered unclassified products, and the depth of sustainability assessment should correspond to the client’s expressed needs.

• Disclosure and Naming

The Platform suggests straightforward naming conventions and disclosures to distinguish between product categories. Products without sustainability claims should avoid using related terms in their names.

Conclusion

Although the European Commission has not committed to a timeline for acting on the Platform’s recommendations, these proposals could significantly influence future developments in the sustainable finance sector.

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