A look at the proposed evolution of SFDR
The Sustainable Finance Disclosure Regulation was created to establish harmonised requirements for financial market participants and ensure clarity around how they integrate environmental, social, and good governance factors into investment decisions, financial advice, and broader and product-specific sustainability goals.
Since implementation in March 2021, SFDR Article 81 and 92 investment products have come to represent nearly half of European Union assets under management.
After considerable feedback from the industry, the European Commission agreed the framework was overly complex, had been applied inconsistently, and had been misused to label investment products.
In response, the Commission proposed revisions to the SFDR. The aim is to simplify the requirements, reduce the costs and burden of compliance, and improve visibility and comparability of products for investors as it introduces categories for sustainability-related financial products.
The proposals should help tackle greenwashing and maintain the integrity of the EU’s market for sustainable finance.
- Article 8: Financial products that claim to be promoting social or environmental characteristics
- Article 9: Financial products that claim to have ‘Sustainable Investment’ as their objective.
Product categorisation
The proposals replace the ‘Article 8 and 9’ shorthand with three clear categories for sustainability-related products. Each category requires that at least 70% of investments align with its sustainability claims and comply with common exclusion rules.
Products must use appropriate sustainability indicators to measure compliance. The remaining roughly 30% of assets can be used for portfolio diversification, liquidity, or hedging, provided investments do not run counter to the product’s claims.
Three new categories for sustainability-related products
Transition category (new Article 7) | Products investing in or contributing to transition activities must hold 70% of assets in activities supporting environmental or social transition objectives as determined by the EU Climate Transition (CTB) or Paris-Aligned benchmarks (PAB), or EU Taxonomy-aligned activities, credible issuer transition plans, or science-based decarbonisation pathways. These products must also identify and disclose relevant Principal Adverse Impacts (PAIs) indicators and explain mitigation actions. Excluded from eligible investments are prohibited weapons, tobacco, United Nations Global Compact violators, companies that derive 1% or more of their revenues from hard coal/lignite producers, new projects in oil and gas and hard coal and lignite, and companies that do not have coal phase-out plans. |
ESG basics category (new Article 8) | Products integrating sustainability factors beyond risk management without a specific sustainability or transition objective must allocate 70% of the portfolio to assets integrating ‘sustainability factors’. Eligible approaches include funds outperforming benchmarks on ESG ratings or specific sustainability indicators, favouring issuers with positive sustainability records, or combining elements from other toolkits. Some PAB exclusions apply.3 |
Sustainable category (new Article 9) | Products investing 70% in sustainable undertakings, activities, or assets contributing to environmental or social objectives. These funds must identify and disclose PAIs, and actions taken, with stricter exclusions for fossil-fuel value-chain activities and new oil & gas developments than those applied to Article 8 products. |
Portfolios needing a phase-in period (e.g., portfolios investing in private markets) will be allowed to reach the target share over a disclosed timeline.
- {https://eur-lex.europa.eu/eli/reg_del/2020/1818/oj/eng;Article 12(1), points (a), (b), (c) and (d), of Delegated regulation - 2020/1818 - EN - EUR-Lex}
Shortcuts and impact designation
Products managed by reference to EU Climate benchmarks or with 15% or more EU Taxonomy-aligned investments could qualify for the sustainable or transition categories.
‘Impact’ claims are restricted to products categorised as transition (Article 7) or sustainable (Article 9) with intentional, measurable impact and outcomes reporting.
Simplification and cost reduction
The proposals eliminate entity-level PAI statements and remuneration disclosures to avoid duplication with the Corporate Sustainability Reporting Directive (CSRD) which requires companies to report on sustainability matters and cut costs – especially for small and medium-sized companies.
The definition of ‘sustainable investment’ is deleted; its concepts will be embedded in category criteria. ‘Level-2 delegated acts’ will be adopted to specify notably voluntary sets of indicators, calculation rules, and template limits.
Guardrails against greenwashing
Only categorised products may use sustainability claims in their names and marketing.
Uncategorised products may refer to sustainability in disclosures, but not in names or central marketing.
Products using ESG ratings must provide transparency under the new EU ESG Ratings Regulation.
Data governance is strengthened, requiring documented methodologies and transparency for estimates.
Expected impact
While it may take significant time before the proposals enter into force, the reforms aim to protect investors, reduce costs, and improve product comparability.
They seek to better align SFDR with other EU frameworks, support unified supervision, and unlock capital for transition finance, while maintaining innovation and minimum safeguards.
The BNPP AM view
In our view, all of these are laudable goals, notably the proposed simplification of disclosure requirements.
The key challenges will be:
- To reach the right balance between sufficient ambition in the definition of the categories and ensuring that corresponding investment universes are sufficiently broad
- To ensure that new categories are used effectively to deliver clearer information to end-investors when making investment decisions.
Criteria used and exclusions retained for each category will be key in the success of the new SFDR.
In conclusion, from an investor’s perspective, these proposed SFDR revisions could improve clarity and confidence in selecting sustainability-related product. By introducing new categories and simplifying the transparency requirements, the new framework may lead to more consistent and reliable information, thereby making it easier to identify investments that align with an individual investor’s sustainability goals and preferences.
While these are still proposed changes and their final impact remains to be seen, they signal a direction that, if properly designed and implemented, could help a variety of investors to better navigate the evolving landscape of sustainable finance.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of BNP PARIBAS ASSET MANAGEMENT Europe or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
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