Unveiling the EU's Path to Sustainable Finance

Fund Categories

The EU Platform recommends categorizing funds in a comprehensive manner. The sustainable category focuses on funds contributing to sustainable investment objectives through EU Taxonomy-aligned investments or sustainable investments with no significant harmful activities. The use of the EU Taxonomy is highly emphasized here, with a clear distinction from the more flexible definition in the SFDR. For the DNSH test, principal adverse impacts must be assessed, and specific exclusion criteria must be complied with. Additionally, more granular reporting on PAIs is encouraged to ensure transparency.

Transition funds are intended to support the transition to a net-zero and sustainable economy, avoiding carbon lock-ins. Various commitment options are available, such as complying with decarbonization regulations or tracking specific benchmarks. The exclusion criteria differ from the sustainable category, and sustainability indicators must be reported based on the committed option.

The ESG collection category allows for flexibility in committing to material sustainability features. This includes reducing the investment universe, investing in sustainable funds, and engaging with companies. Adherence to minimum exclusions and reporting on EU Taxonomy alignment and PAIs are also crucial.

Disclosures for All Funds

In a departure from the current light-touch disclosure requirements, all funds are proposed to report on EU Taxonomy alignment (revenue and CapEx) and specific PAIs on GHG emissions, carbon footprint, and more. Limited options for not providing these disclosures are noted, and estimates may be used in some cases.

Private Markets

The Proposal acknowledges the importance of retail investors and their needs in private markets. PAIs are often not tailored for private market investments, and the Platform calls for guidance from the Commission on assessing these investments via PAIs. Suggestions for tailored indicators and analysis on setting thresholds are also put forward. Additionally, the concept of mandatory commitments and their applicability in different phases of private market funds is discussed.

Application to Overseas Funds marketed in the EEA by non-EEA Managers is not directly covered in the Proposal, but it is presumed that marketing notifications will bring such funds into scope. Next steps remain uncertain, but the influential Proposal is likely to trigger momentum in sustainable finance developments.