ESAs propose introduction of SFDR labels

June 20th, 2024

The three European Supervisory Authorities (ESAs) have published a joint proposal calling for an update to the Sustainable Finance Disclosure Regulation (SFDR).

The regulators, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), recommended two voluntary product categories be added to the regulation.

The first category, �sustainable�, would be used for products that invest in assets that are already environmentally and/or socially sustainable.

Any product using the label would be required to comply with a minimum �sustainability threshold�.

The second category, �transition�, would be used for products that invest in assets that are not yet sustainable, but which improve their sustainability over time.

It also suggested that products using the transition label could implement requirements for a company�s transition plan to be eligible for them to invest in.

In April 2023, the European Commission updated its SFDR guidance to confirm that the regulations would not introduce a minimum requirement for products or �prescribe any specific approach to determine the contribution of an investment to environmental or social objectives�.

The ESAs also recommended that the European Commission introduce a sustainability indicator to grade financial products such as investment funds, life insurance and pension products.

They also called for appropriate disclosures for products outside the two categories to reduce greenwashing and improvements to the definition of sustainable investments.

The proposal follows the European Commission�s consultation on SFDR in January, when several responses urged it to take a new approach to fund labelling and mandatory disclosures amid criticism that some Article 8 and 9 funds, the classification for funds which meet the highest sustainability criteria, were investing in fossil fuels.

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