Stockholm (NordSIP) – Since the EU’s Sustainable Finance Disclosure Regulation (SFDR) became applicable in 2021, what was intended as a reporting framework gradually took on the role of a de facto sustainable fund classification system. By filling this gap in the market, the SFDR appears to have caused more confusion for market participants rather than the greater transparency that was originally sought. As part of an ongoing review of the regulations, the Platform on Sustainable Finance (PSF) published its recommendations for the categorisation of products under the SFDR.
PSF is an advisory body to the EU Commission, comprising 49 sustainability experts drawn from a variety of stakeholder groups: private stakeholders from financial, non-financial and business sectors, NGOs and civil society, academia and think tanks, experts in personal capacity, as well as public and international institutions.
In this latest briefing document, the PSF is recommending the implementation of a new product categorisation that would simplify the decision-making process of retail investors while remaining practicable for the institutional market. The proposed classification is as follows:
Sustainable
Strategies based on 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.
Fund providers will need to comply with as yet unspecified minimum percentages of assets meeting the qualifying criteria of their respective category. For instance, within the Sustainable category, underlying assets will have to show evidence of positive contribution according to Taxonomy definitions. The remaining assets in these portfolios will need to meet minimum Do No Significant Harm (DNSH) criteria and not contradict the positive outcomes of the core sustainability-focused holdings.
In the interests of simplicity, the PSF recommends that all fund products not qualifying for any of the three main categories should be labelled as ‘unclassified.’ Once implemented, the PSF hopes that the new classification system will effectively replace the common practice thus far of labelling funds as Article 6, 8, or 9. The PSF has a purely advisory role, which means that these latest recommendations will now need to be debated and ultimately approved by the relevant EU legislative bodies.
