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Under the European Union’s mandate, the Platform on Sustainable Finance (PSF) has been working to enhance the effectiveness of the Sustainable Finance Disclosure Regulation (SFDR). This includes ensuring consistency with the broader Sustainable Finance Framework.
In December 2024, the PSF released a proposal for a new categorisation scheme for financial products, which it recommends the European Commission implement as part of the SFDR review process later this year.
The proposed categorisation, designed with investors in mind, introduces three distinct categories of sustainability strategies: Sustainable, Transition and ESG Collection. Each category has clearly defined minimum criteria, objectives, and measurable key performance indicators (KPIs). Products that do not meet the requirements of one of these categories will be identified as ‘Unclassified’.
Reduce fragmentation and confusion
This scheme builds upon the Sustainable Finance Framework, leveraging tools such as the EU Taxonomy, EU Climate Benchmarks, EU Green Bond Standards, Principal Adverse Impact indicators, and the Corporate Sustainability Reporting Directive (CSRD) to assess the minimum criteria and KPIs for each category. The intention is to reduce fragmentation and confusion in the EU and ensure that no single product’s objective is perceived as superior to another.
Given that investors operate on a global scale and allocate capital across borders, the PSF has created a model compatible with international schemes. This helps investors, businesses, and policymakers share a common understanding of sustainability, including what a sustainable product can offer. Indeed, the more systems that are established with different requirements or indicators, the more difficult it becomes for financial market participants.
As a result, the proposed categorisation draws on existing market schemes, including the FCA’s Sustainability Disclosure Requirements (SDR) labelling regime in the UK. Unlike labelling schemes, which can require third-party verification, a categorisation scheme follows specific rules and avoids additional assurance requirements, thus reducing costs.
Like the FCA’s SDR and ESMA’s fund naming guidelines, the PSF suggests that names should only be used by products that qualify for those categories, and unclassified products should not use sustainability-related terms in their names. This approach addresses broader market challenges around greenwashing while also promoting a unified approach to sustainability.
Financial market participants will retain full flexibility in adopting the categorisation scheme. Those choosing to adopt the names product adjustments, will have to align with ESMA guidelines on fund naming, with some amendments regarding Climate Benchmark exclusions and, specifically, excluding companies that violate the United Nation Guiding Principles (UNGP) instead of the United Nation Global Compact (UNGC).
Easily identifiable
To strengthen the sustainability aspect of financial products, the PSF recommends refining the definition of “sustainable investment” and enhancing the Do No Significant Harm (DNSH) test. For DNSH, any thresholds should be evidence- and science-based.
The new scheme requires a certain threshold of assets to contribute positively through EU Taxonomy-aligned, or environmental and/or social Sustainable investments, based on a defined methodology. The choice of using the EU Taxonomy as a tool to classify what constitutes as a sustainable investment, besides being a core element of the EU Sustainable Finance Framework, will allow investors to more easily identify investments which are in line with long term environmental goals.
Given the current low percentages of EU Taxonomy alignment being reported, the PSF also adds that, while the percentage of investments aligned may be low to start with, it should increase over time as both the quantity, and quality of data improves. One further benefit of the strict criteria is that it should strengthen the perceived shortcomings on the current legal definition of sustainable investment which is based solely on a providers methodology meaning it is open to different interpretations.
Ultimately, the move from a disclosure regime to a categorisation scheme is not expected to trigger significant new information requirements beyond those already in place. As in evaluating the proposed changes, the PSF considered factors such as data availability, data coverage, impact on existing products, and the possibility of tightening minimum criteria over time to limit any immediate large-scale implementation changes needed.
Conclusion
To prepare for these changes, asset managers should not only assess their portfolio holdings in companies exposed to Climate Benchmarks’ exclusions but alsos to enhance their sustainable investment methodology to include EU Taxonomy-aligned activities so to better classify their products under the proposed future classification.
Once implemented, the ESMA Guidelines on fund naming, will provide further guidance on which funds would be best suited to meet tone of the PSF’s recommended category’s requirements.
This article appeared for the first time on Investment Week
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