Product Classification Scheme Based on SFDR
EU proposes a product classification scheme based on the Sustainable Finance Disclosure Regulation (SFDR), aimed at meeting investors’ sustainable investment preferences and improving the consistency of sustainable disclosure for financial products.
The EU plans to align the sustainable characteristics of financial products with investors’ preferences, to promote capital flows and sustainable economic growth and meet 2050 climate targets.
Related Post: CFA Institute Releases ESG Fund Classification System Report
EU Platform on Sustainable Finance
The EU Platform on Sustainable Finance aims to enhance the effectiveness of the sustainable finance framework and has released two reports on SFDR:
- SFDR Level 1 Brief: The EU Platform on Sustainable Finance suggests introducing a universal classification scheme for financial products to address the information confusion in the market and meet the sustainable preferences of investors.
- SFDR Regulatory Technical Standards Brief (SFDR RTS Brief): The EU Platform on Sustainable Finance responds to inquiries from EU ESAs (ESMA, EBA and EIPOA) regarding SFDR to prepare for the development of data and methods related to financial product classification.
Introduction to Product Classification Scheme Based on SFDR
The EU Platform on Sustainable Finance plans to establish a product classification scheme based on the Sustainable Financial Disclosure Regulation, which involves three product categories, each with minimum standards. If the product cannot meet any of the standards, it will be marked as unclassified. The EU believes that the current product classification standards can be relatively low, and in the future, the product classification standards will be combined with the EU Taxonomy to reflect the consistency between product investment objectives and taxonomy based economic activities.
The product categories under proposed product classification scheme include:
- Sustainable: X% of funds make positive contributions to environmental or social sustainability investments, or invest in economic activities consistent with the EU Taxonomy, without investing in assets that have a negative impact on sustainability goals. All investments that are inconsistent with the Taxonomy can pass the Do No Significant Harm (DNSH) test. Investment activities should also comply with the EU Paris Aligned Benchmarks (EU PAB).
- Transition: X% of the funds are invested in targets with reliable transition paths and plans that meet transition standards or comply with EU PAB or EU Climate Transition Benchmarks (EU CTB), while not having negative impacts on transition activities. When investing in targets without a transition plan, it is necessary for asset managers to develop an engagement strategy.
- ESG Collection: X% of funds are invested in targets that have material environmental, social, or governance characteristics and will not have a negative impact on other ESG issues. Investment targets need to undergo negative screening based on climate transition benchmarks.
In addition to the Sustainable Financial Disclosure Regulation, EU Taxonomy, and EU climate benchmarks mentioned above, the classification schemes will also be based on regulatory policies such as the EU Green Bond Standards and Principal Adverse Impacts (PAI). The EU Platform on Sustainable Finance recommends using minimum standards as the primary criterion for category selection, requiring a portion of the assets in the product to meet the corresponding characteristics.
The EU Platform on Sustainable Finance believes that the classification of financial products needs to be accurately and clearly disclosed to investors. These disclosures include pre contract disclosures, website disclosures, and reports. Pre contract disclosure only needs to include the most important information for investors to understand, while the latter two can provide more detailed information. All disclosures must be easy to understand, easy to read, and consistent. In terms of product naming, only products that meet the requirements of a category can use the corresponding name to avoid greenwashing.
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