Advisors have told the European Commission to replace the current categories under the Sustainable Finance Disclosure Regulation (SFDR) with three new ones.

The Platform on Sustainable Finance (PSF), which is responsible for shaping the European Union’s thinking on key files including the Taxonomy Regulation and the Green Bond Standard, published its recommendations for the future of the controversial fund disclosure rules.

It argued that the current categories under SFDR should be replaced with alternatives that better reflect the current range of sustainability-related strategies being deployed by institutional investors.

These include a new ‘sustainable’ label, for strategies that support business activities aligned with the EU Taxonomy, or those with “no significant harmful activities or assets based on a more concise definition consistent with the taxonomy”.

It also includes a ‘transition’ label, for strategies focused on financing the climate and broader shift to a sustainable economy.

Last year, the Commission published recommendations on how to support such a transition, which emphasised the need to avoid ‘locking-in’ polluting assets when financing investments that claimed to be on their way to becoming low-carbon. PSF noted this in its advice.

Finally, the Platform said there should be a category for strategies it calls “ESG Collection”. These tend to relate to more traditional approaches, such as excluding significantly harmful activities or companies, or applying best-in-class filters.

“All other products should be identified as unclassified products,” the Platform told the Commission.

The three categories should replace the current expectation that sustainability-related financial products should be identified as either ‘Article 8’ and ‘Article 9’ under SFDR.

Platform chair and commissioner at the Spanish financial markets authority, Helen Vines Fiestas, was the lead author of the report.

Other formal contributors include Ursula Bordas, a sustainability specialist at the European Insurance and Occupational Pensions Authority, Jörg Ladwein, regional chief investment officer at Allianz Investment Management, and Clémence Humeau, head of sustainability coordination and governance at AXA.

The proposals appear to double down on the need for SFDR to be recognised as a tool to safeguard retail investors from ambiguity or potential greenwashing, not asset owners or other qualified institutional investors.

“This categorisation scheme should be grounded in the sustainability strategy of the financial product and align with an investor’s values or impact objectives,” it said.

“Investors’ sustainability values should be identified through their preferences, enabling a clear match with available products.”

Currently, this matching process takes place because, under MIFID II, banks and financial advisors are now required to ask retail investors about their sustainability preferences before offering them financial products.

However, PSF’s proposals note that the current process is flawed, and needs to be revisited in order for SFDR to realise its potential as a way to direct capital into strategies aligned with European investors’ values and sustainability objectives.

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