EU SFDR: the future of sustainable finance disclosure and recommendations of the EU Platform on Sustainable Finance

As part of the review of the Sustainable Finance Disclosure Regulation (SFDR), on 17 December 2024, the EU Platform on Sustainable Finance (the Platform, an advisory body to the European Commission) published the long-awaited “Categorisation of Products under the SFDR: Proposal of the Platform on Sustainable Finance”.

The publication of the Platform’s proposal follows the public and targeted consultations made by the Commission in September 2023 and the publication of a Summary Report of the responses to the public and targeted consultations on 3 May 2024.  The Summary Report sets out the key limitations of the SFDR framework, such as lack of legal clarity regarding key concepts, limited relevance of certain disclosure requirements and issues linked to data availability.

The Platform made these proposals to improve the effectiveness of the SFDR and consistency with the rest of the Sustainable Finance Framework in response to the European Commission’s mandate and recommends implementation of the proposals by the Commission as part of its review process.  The recommendations are not binding but will have significant sway with the Commission.

The Platform recommends new product categories under SFDR

The Platform recommends categorising financial products with the following sustainability strategies:

• Sustainable: Products that can largely be considered sustainable through their solutions or practices in line with EU classification where it exists; investment strategy requires contributions through EU 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: Products that foster the transition to a net zero and an overall sustainable economy by 2050, avoiding carbon lock-ins, in line with the Commission's recommendations on facilitating finance for the transition to a sustainable economy.
• ESG collection: Products that select or exclude sectors or companies based on ESG performance; strategy excludes significantly harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability criteria.

All other products should be identified as unclassified products.

The Platform proposal sets out mandatory minimum criteria for each category, including minimum investment levels (i) aligned with the EU Taxonomy or social Sustainable Investments, in the case of “Sustainable”, (ii) invested in assets which are transitioning in line with a credible transition plan or plans on the portfolio or investment level, in the case of “Transition” and (iii) aligned with a material sustainability feature, in the case of “ESG collection” and measurable KPIs for all. Products within these categories should measure and disclose their sustainability performance.  The briefing paper sets out the proposals and suggested requirements in detail in the table on pages 7 to 12.

What should the scope of categorisation under the SFDR extend to?

The Platform recommends that the Commission evaluates whether the scope of the categorisation should go beyond the current SFDR, considering whether all products and services under sustainability preferences in the Insurance Distribution Directive or the Markets in Financial Instruments Directive II should be categorised. Furthermore, the Platform recommends that the Commission develop a common understanding on impact investing within the EU sustainable finance framework and how it relates to the EU Taxonomy to determine how to integrate it into the categorisation scheme.

The proposal serves as a basis from which to build a complete and detailed categorisation scheme. The proposal requires further development to define or refine thresholds based on real-world testing and the briefing states that: “Achieving market acceptance and trust involves balancing concerns from investors, market participants, regulators, and civil society”. 

What does this mean for market participants?

The recommendations made by the Platform follow the Commission public and targeted consultations and a number of recommendations and suggestions made by other organisations.  Broadly these opinions and recommendations (i) support categorisation schemes to help consumers to navigate selection of sustainable finance products, (ii) suggest minimum investment levels of sustainable investments to be included in labelled products, (iii) purpose minimum disclosure for non-labelled products, (iv) address transition finance and the information that consumers need to make choices, (v) consider impact finance and how this fits into the framework, (vi) consider developing a social taxonomy and (vii) revisit the definition of “sustainability” and “sustainable objectives” to create consistency across the sustainable finance landscape. 

It seems likely that the Commission’s proposal, expected in the first half of 2025, will consider the Platform’s suggestions in more detail and will suggest some kind of categorisation or label system. It will also promote coherence with other EU legislation to promote simplification in line with the promises made by the Commission in creating the omnibus simplification package.

Our global Sustainable Finance & Investment group brings together a multidisciplinary global team that provides clients with best-in-market support.  We are following developments relating to the SFDR and in ESG regulation more generally, so please get in touch if you would like to discuss.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Jochen Seitz, Rita Hunter, Anna Hersener, Lena Markert, and Emily Julier.