SFDR:

ESAs PROPOSE A NEW CLASSIFICATION SYSTEM
 

Estimated reading time: 2 min.

 

Since its adoption in 2019, the Sustainable Finance Disclosure Regulation (SFDR) has aimed to improve transparency around the sustainability objectives of financial products. The framework was later expanded with amendments in 2020 and detailed Regulatory Technical Standards (RTS) in 2022. In 2023, the European Commission (EC) launched a consultation process to gather feedback on its effectiveness.

At the end of December 2023, the European Supervisory Authorities (ESAs) published their response, calling for significant changes to the system in line with stakeholder views. Their proposals focus on simplifying classifications and making sustainability claims more reliable and comparable.

 

 

KEY UPDATES IN THE SFDR FRAMEWORK

The ESAs recommend a revised system built on two streamlined categories:

  • Sustainability category: for products that make a substantial contribution to sustainable development objectives, defined by specific and measurable criteria.
  • Transition category: for products moving towards sustainability but not yet meeting the full requirements of the Sustainability category. These are assessed on their ongoing efforts to strengthen environmental and social characteristics.

In addition, the ESAs propose a grading system to evaluate and communicate the degree of alignment between financial products and sustainability goals. This new indicator would make sustainability credentials easier to compare and understand for investors.

 

SFDR, ESAs, regulation

 

IMPLICATIONS FOR THE FINANCIAL INDUSTRY

For financial actors—including asset managers, insurance companies, pension funds, and financial advisors—the proposed changes carry practical consequences:

 

    DATA REQUIREMENTS

    More granular ESG data will be necessary to demonstrate compliance with the new classification system.

    FLEXIBILITY AND SPEED

    Organizations will need processes that can quickly adapt to evolving definitions and criteria.

    REGULATORY MONITORING

    Continuous attention to updates will be key to maintaining accurate classifications and avoiding reputational risk.

 

Overall, the new framework aims to align investor information with real, measurable sustainability outcomes.

 

LOOKING AHEAD

 

The ESAs’ proposals mark a step towards greater clarity, transparency, and consistency in sustainable finance regulation. However, further guidance from the European Commission will be needed to define detailed thresholds, methodologies, and implementation timelines.

For the financial sector, the transition will require balancing compliance with innovation, ensuring that products can both meet regulatory standards and address investors’ growing demand for credible sustainability.

 

FROM DISCLOSURE TO TRANSPARENCY

 

The suggested overhaul of the SFDR reflects a broader trend: shifting from complex disclosure requirements to clearer, outcome-oriented classifications. By introducing simplified categories and a new grading system, the ESAs aim to provide investors with reliable information and strengthen trust in sustainable finance.

 

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