EU member states have agreed a negotiating position on updated transparency rules for sustainable financial products sold in the bloc, including a new set of labels intended to make sustainability claims easier to understand and compare.
The changes would update the EU’s Sustainable Finance Disclosure Regulation (SFDR), which has applied since March 2021 and requires financial market participants to disclose how they take account of environmental, social and governance — known as ESG — risks and the negative effects their investments can have, the Council of the EU informed on Wednesday.
Under the Council’s approach, financial products would be grouped into three categories: “sustainable”, for products contributing to sustainability goals; “transition”, for products backing companies or projects that are not yet sustainable but are on a “credible path”; and “ESG basics”, for products that use ESG approaches but do not meet the criteria for the other two categories.
The new categories would replace existing concepts that have led to “greenwashing” — when environmental impacts or benefits are misrepresented — and would reduce administrative work for financial market participants.
What the Council wants changed
The Council’s position would tighten the conditions for products to be classed as “sustainable” or “transition” when investment firms disclose “principal adverse impacts” — a formal SFDR term for the main negative effects of investments on sustainability factors — by requiring mandatory use of at least three indicators from a list to be provided by the European Commission.
It also set out conditions under which some investments in fossil fuel companies could be included in the “transition” category, including where a company allocates 20% of capital expenditure to economic activities aligned with the EU taxonomy — the EU’s classification system for environmentally sustainable activities — and has a clear, time-bound plan to reduce greenhouse gas emissions.
Some public-sector debt could also be eligible for the transition category, with the Council proposing to explicitly allow general-purpose issuances by EU-established public bodies to be included under certain conditions.
To reduce administrative burden, the Council said its negotiating mandate would allow financial market participants not to apply the new categorisation provisions to alternative investment funds sold exclusively to professional investors.
Negotiations with the European Parliament can begin once MEPs agree their own position, the Council said.
