SFDR Review: New Recommendations for Financial Product Categorization

The Sustainable Finance Platform has published a report in which it presents a new categorization of financial products subject to the Sustainable Finance Disclosure Regulation (SFDR). In particular, the expert group has identified three main categories and minimum criteria to be met to fall within them.

Products that do not fall within these three categories – namely sustainable products, transition products, ESG collections – will be “unclassified”. The document represents a further step in the context of the review of the SFDR, with the aim of ensuring greater clarity and transparency for investors and industry operators.

The SFDR platform also highlighted that investors’ sustainability preferences should always be explored through questions that reflect their investment objectives and that unrated products should not be offered to clients with sustainability preferences.

The expert group also stressed that pre-contractual and periodic disclosures should be clear, concise and consistent, using category names that help investors identify products that match their sustainability preferences. Unclassified products should not use sustainability-related terms in their names.

The Three Categories of Financial Products According to SFDR

The SFDR report introduces three main categories for financial products, namely sustainable, transition and ESG products.

“Sustainable” products

This category includes investments that positively contribute to the achievement of sustainability objectives through activities aligned with the EU Taxonomy or sustainable investments that do not involve significantly harmful activities. Therefore, in the case of non-aligned investments, these must necessarily pass the “Do No Significant Harm” (DNSH) criterion.

The indicators can be the percentage of alignment with the taxonomy, the share of sustainable investments, performance of the main impact indicators (PAI), adherence to the exclusion criteria which include activities that violate the United Nations principles on human rights, production of controversial weapons, tobacco.

“Transitional” products

According to SFDR, this category includes investments or portfolios that support the transition to a sustainable, net-zero economy, avoiding carbon lock-in. A minimum percentage of investments must be aligned with credible transition strategies, such as corporate transition plans or investments in activities aligned with the taxonomy.

Indicators include credible transition plans, greenhouse gas emissions reduction, alignment with the taxonomy, engagement and voting activities. Activities that cannot be transformed sustainably, such as thermal coal production, cannot be included in this category.

“ESG collection” products

This category includes products that exclude significantly harmful investments or activities and/or invest in activities with high integration of environmental, social and governance (ESG) criteria. A minimum percentage of investments must follow one or more material sustainability approaches, such as improving ESG performance compared to a reference benchmark, according to the SFDR.

Indicators include performance compared to ESG benchmarks, reduction of the investment universe, allocation to sustainable target vehicles, ESG transition or ESG harvesting.
Examples of exclusion reported by experts include activities that violate the exclusion criteria of climate transition benchmarks (CTB) or Paris-aligned benchmarks (PAB).

This categorization in line with the SFDR aims to facilitate understanding for retail investors, ensure investor protection, unlock capital to support the Sustainable Finance Agenda and promote transparency and comparability of sustainable financial products.

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(Featured image by Guillame de Germain via Unsplash)

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First published in ESG NEWS. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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