Will 2025 see a steep change in SFDR? | Insights

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With the dawn of the new year, the question on everyone's mind is whether 2025 will see a steep change in SFDR? The Platform on sustainable finance (the Platform), an advisory board to the European Commission (the Commission), seem to think so with their proposal to overhaul the current regime and replace it with a new categorisation system.

The Platform has recommended categorising products with the following sustainability strategies:

Sustainable	Transitioning	ESG Collection
Under the sustainable category, a minimum proportion of the fund's assets must contribute positively through Taxonomy-aligned investments or sustainable investments. The fund cannot hold any assets that undermine the sustainability objective of the Fund. Importantly, if an economic activity falls under the EU Taxonomy, the more stringent requirements of the EU Taxonomy must be met for it to be considered a sustainable investment. SFDR's more flexible definition of sustainable investment will only be permitted to be used if the economic activity does not fall under the EU Taxonomy. This means that the bar to fall within this category is likely to be higher than the traditional Article 9 SFDR requirements, which only requires fund to have sustainable investments as its objective (using the more flexible SFDR definition). Non-taxonomy investments must pass the Do No Significant Harm test through consideration of the PAIs relevant to the sustainability features of the fund. The EU Paris Aligned Benchmark ("PAB") exclusions must be complied with. Firms may also determine additional binding elements, for example, engagement.	The transition category covers investments or portfolios supporting the transition to a net zero and sustainable economy, avoiding carbon lock-ins, per the Commission's recommendations on facilitating financing for the transition to a sustainable economy. A minimum proportion of the assets or portfolio of the fund must be transitioning, measured with credible transition pathways or plans on portfolio and/or investment level. Any other assets held by the fund must not undermine the transition benchmark. The exclusions set out in the Climate Transition Benchmarks ("CTB") must be met.	Funds falling under this category will be required to exclude significant harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability features. Investments must be committed to one or more "material sustainability features" including, but not limited to, year-on-year improvement on specific sustainability indicators, effective reduction of investment universe, investing in funds that themselves sustainable, transition of ESG collection. All other assets must not undermine the ESG characteristics/features. The exclusions set out in the Climate Transition Benchmarks ("CTB") must be met. Firms may also determine additional binding elements.

It is proposed that products that do not fall within any of the aforementioned categories will be considered "unclassified" and must include a disclaimer stating that:

The product is unclassified.
It does not fulfil the standards required for a categorised product; and
Any ESG characteristics or sustainable or transition features must only be described in the legal documentation.

In addition, managers will no longer be able to opt-out of Taxonomy alignment consideration and disclosure with the proposals suggesting that all products (even unclassified products) are required to report on the following:

Taxonomy alignment (Revenues and CapEx); and
PAIs: GHG emissions (1), carbon footprint (2), GHG intensity of investeee companies (4) and UNGPs (10)

What is next?

The Platform proposals are not binding but are similar to opinions provided by the European Supervisory Authorities earlier in 2024. The timeline for SFDR 2.0 is still not set in stone, but the proposals presented by the Platform give the Commission some additional food for thought and potentially a new direction for SFDR in 2025.

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