The EU Platform on Sustainable Finance (PSF) – an adviser to the EU Commission – has proposed a new categorization scheme for SFDR (Sustainable Finance Disclosure Regulation).

The PSF was commissioned to propose enhancements to the effectiveness of SFDR, part of a wider EU assessment of the future of the regime. It follows proposals from the ESA’s in June 2024 (suggesting product categories), and ESMA in July 2024 (suggesting disclosures for all funds).

Product categories

The PSF’s final report recommends categorizing products with the following sustainability strategies:

Category Name	Description
Sustainable	Contributions through Taxonomy-aligned Investments or Sustainable Investments with no significant harmful activities, or assets based on a more concise definition consistent with the EU Taxonomy.
Transition	Investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock-ins, in line with the European Commission’s recommendations on facilitating finance for the transition to a sustainable economy.
ESG Collection	Excluding significantly harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability features.
Unclassified Products	All other products that do not meet the above definitions.

The report suggests the proposed categories would have “precise minimum criteria, clearly defined objectives and measurable KPIs.” Products within the categories are also expected to measure and disclose their sustainability performance.

The proposal remains high-level and is intended to serve as a basis from which a complete and detailed categorization scheme might be built by the EU Commission. The report notes that “further work will be required in order to define or refine thresholds based on real world testing.”

Key elements of the proposal

SFDR has long been criticised for its excessive complexity and for creating confusion by acting as a de facto labelling regime – it was originally conceived as a disclosure mechanism. The PSF proposal to create a common categorization scheme seeks to address these issues and increase consistency with the rest of the EU Sustainable Finance Framework.

The report emphasizes a number of key points:

• The common categorization scheme should address the existing fragmentation and confusion in the EU market.

To help support this, PSF suggests “applying minimum criteria as a pre-condition for financial products to be included in a certain category”. This is a welcome change that will provide the clarity that has to date been lacking from the Article 8 and 9 disclosure rules.

• ESG Collection would have defined minimum criteria with a focus on environmental, social, and/or governance.

Many of today’s Article 8 reporting funds will likely qualify for the ESG Collection classification. This will include governance in the same approach as environmental and social features – a welcome improvement on today’s Article 8 framework which has a separate approach for environmental/social characteristics versus good governance assessments.

• Unclassified products should be required to report on taxonomy alignment, PAI GHG emissions (1), carbon footprint (2) GHG intensity (3) and UNGPs or OECD MNEs (10).

This would require reporting for current Article 6 products, which was not previously required and may result in a significant operational / resource uplift, especially as it relates to data collection for such reporting. Note that mandatory pre-contractual disclosures would not apply to Unclassified Products.

• Indicators such as PAIs (Principal Adverse Impact) are often not tailored for private market investments. For investors, guidance on how these investments could be assessed would be welcomed.

The proposal acknowledges data challenges for certain PAIs for private market investors and suggests that guidance could be done “by providing examples of indicators usable as a proxy for indicators commonly used for listed asset classes.” This is also welcome, given the challenges we have sought to address with private market clients trying to report on PAIs in the past.

• It should be clear how products disclosing under Article 6, but also 8 and 9 SFDR fit in it… Additional costs and resources should be kept to a minimum.

The proposal notes that “through market testing, it could be estimated how many Article 8 products today would be Unclassified Products tomorrow”. It’s also possible that certain managers might “consider changing a product’s sustainability feature in light of the new rules.” In our opinion, the transition process to a new SFDR framework is critically important, and should be delivered with clarity, time and efficiency in mind. The current suggested mapping from Article 6/8/9 to the new classifications is as follows:

Category Name	Sustainable	Transition	ESG Collection	Unclassified
Article 6	x	x	x	Yes
Article 8	Yes	Yes	Yes	Yes
Article 9	Yes	Yes	x	x

Conclusion

The PSF proposal outlines the new categorization scheme and considerations to be reviewed by the Commission as it plans the future of SFDR. It’s now up to the Commission to decide if and how to implement these recommendations.

The PSF recommendations follow a long line of proposals and suggestions all seeking to formalize the use of SFDR and introduce clear categories that will provide clarity and certainty to the market. Though the details remain to be determined, it seems increasingly clear this is the direction SFDR is taking. We welcome these changes and look forward to hearing more through the course of 2025.