As a reminder, a consultation on the Sustainable Finance Disclosure Regulation (SFDR) was open from 14 September 2023 to 22 December 2023, outlining two potential approaches to the proposed changes. The first option would build upon the existing product categorisation framework, further distinguishing between Articles 8 and 9. The second option would introduce an alternative system based on investment strategy classifications (e.g., a commitment to positive contribution to specific sustainability objectives or a transition focus), which would not necessarily align with existing SDFR concepts.
An interesting recent development is the EU Platform on Sustainable Finance (the Platform), which serves as an advisory body to the EU Commission, publishing a proposal on SFDR in December 2024. Below are a few takeaways from this proposal:
The Platform has identified three product categories based on investor interests in sustainable investments:
· Sustainable: Investments should contribute through Taxonomy-aligned investments or Sustainable Investments (as defined under SFDR) without significant harmful activities, or be based on a refined definition aligned with the EU Taxonomy.
· Transition: Investments or portfolios should support the transition to net zero and a sustainable economy, avoiding carbon lock-ins, in line with the European Commission’s recommendations on financing the transition.
· ESG collection: Products should exclude significantly harmful investments or activities, allocate assets based on enhanced environmental and/or social criteria or apply various sustainability features.
Each of these three categories would require minimum safeguards, such as the Paris-Aligned Benchmarks (PABs) or the Climate Transition Benchmarks (CTBs). Any products that do not meet the criteria for these categories would be identified as unclassified products.
The Platform has identified three product categories based on investor interests in sustainable investments: Sustainable, transition and ESG collection.
The proposal places retail investors and their needs at its core, emphasising the importance of clearly defined categories with precise minimum criteria, measurable key performance indicators (KPIs) and transparent objectives. Products within these categories should be required to measure and disclose their sustainability performance.
While the European Commission is not obliged to adopt the Platform’s recommendations, it is likely to draw inspiration from them. As a result, these new categories may provide insight into the future direction of SFDR. Should these changes be implemented, financial market participants will need to adjust their product classifications, disclosures and reporting. However, the Platform has stressed the importance of grandfathering provisions and transition rules to facilitate a smooth implementation of the new framework.
ESMA Guidelines on ESG and Sustainability-Related Fund Names
In May 2023, the European Securities and Markets Authority (ESMA) published new guidelines on the use of ESG and sustainability-related terms in fund names (the Guidelines). In August 2023, ESMA released official translations in all EU languages, with a targeted application date of 21 November 2024. By 21 October 2024, national competent authorities were required to notify ESMA of their intention to comply with the Guidelines.
On 21 October 2024, the Commission de Surveillance du Secteur Financier (the CSSF) confirmed the implementation of the Guidelines in Luxembourg through Circular CSSF 24/863, formally integrating them into the Luxembourg regulatory framework.
The Guidelines apply immediately to new funds, while existing funds have a six-month transition period, requiring compliance by 21 May 2025. As this deadline approaches, it is crucial that fund managers conduct their due diligence to ensure compliance and mitigate regulatory risks. The Guidelines apply to all funds marketed in the EU under a marketing passport.
The impact on fund managers is significant, as the Guidelines introduce strict investment policy requirements and exclusion criteria for funds using ESG or sustainability-related terms. For example, funds using “environmental” or “impact”-related terms must allocate at least 80% of their investments to assets that meet the fund’s environmental or social characteristics or sustainable investment objectives.
Fund managers unable to comply, must either amend the fund name to remove ESG-related terms or modify the investment policy to meet the required criteria.
These funds must exclude investments in companies that (i) are involved in controversial weapons or tobacco cultivation/production, or (ii) have been found in violation of UN Global Compact principles or the OECD Guidelines for Multinational Enterprises by benchmark administrators.
Fund managers unable to comply, must either amend the fund name to remove ESG-related terms or modify the investment policy to meet the required criteria.
While changing a fund name may seem like the simpler option, it can pose challenges depending on the fund’s legal structure. Therefore, fund managers should not underestimate the significance of these Guidelines and should proactively integrate them their processes and governance frameworks.