A body advising the European Commission has recommended changes to the EU’s landmark sustainable investment framework to make it easier for investors to understand what kinds of products they’re buying.
The Platform on Sustainable Finance is proposing a new categorization framework that it said should allow asset managers to transition smoothly from the current requirements and support the transition to net-zero emissions in 2050, according to a statement issued on Dec. 17.
The rule in question is the Sustainable Finance Disclosure Regulation, which affects about $14 trillion of fund assets. SFDR has faced growing criticism since its enforcement in the European Union in early 2021. Confusion over how to interpret the framework led asset managers, including BlackRock and Amundi, to reclassify as much as $215 billion of client assets, and academics have warned that SFDR may even enable greenwashing.
In response, the European Commission launched a consultation in 2023 to gather feedback. That process was completed earlier this year, and revealed significant discontent with the existing rules.
The Platform on Sustainable Finance is recommending that funds fall into one of four categories. They are:
- Sustainable: Investments that align with the EU’s taxonomy of environmentally sustainable business activities or meet its criteria for sustainable investments, including causing no significant harm to the environment or society.
- Transition: Investments or portfolios that support the transition to net zero and are in line with EU recommendations on facilitating the transition to a sustainable economy.
- ESG collection: Investments in assets with credible environmental, social and sustainability features, which aren’t involved in significantly harmful activities.
- Unclassified products
“The proposal puts retail investors and their needs at its core,” according to the report. “The categorization of products should reflect the sustainability strategy employed in constructing each financial product.”
The recommendations come as Europe looks to streamline its environmental, social and governance regulatory regime. Simplification will be at the center of the incoming European Commission’s work, a spokesperson for the EU’s executive arm told Bloomberg last month. The goal is to reduce burdens, the spokesperson said.
The desire to rein in ESG rules follows a stark warning by former European Central Bank President Mario Draghi, who said in September that the EU faces an “existential challenge” unless it takes steps to boost competitiveness with the U.S. and China. It also coincides with growing hostility toward ESG in the U.S., where President-elect Donald Trump has pledged to wind back Biden-era clean-energy initiatives.
