New Sustainability Labels
EU Proposes New Sustainability Labels for Financial Products
The EU is making moves to simplify the complex world of sustainable finance. On 17 December 2024, the EU Platform on Sustainable Finance, an advisory body to the European Commission, published recommendations to reshape the way sustainable finance products are categorised under the Sustainable Finance Disclosure Regulation (SFDR). The goal? To reduce confusion caused by differing national labelling schemes and inconsistent interpretations of SFDR across Europe.
What’s Changing?
The Platform’s proposal introduces a new, clearer categorisation system to replace the current Article 8 and 9 “de facto” labels. Under the suggested changes, financial products would fall into one of three new categories:
- Sustainable: Investments that align with the EU Taxonomy or sustainable investments with no significant harmful activities. This aims to provide a more precise definition that ensures consistency with the EU’s green goals.
- Transition: Portfolios that support the journey to a net-zero and sustainable economy, avoiding long-term reliance on carbon-heavy assets. This aligns with the EU’s broader strategy for financing the green transition.
- ESG Collection: Products that exclude harmful investments and focus on assets with superior environmental and social credentials, applying various sustainability strategies.
Products that don’t fit into these categories will be considered “unclassified,” but they’ll still need to meet minimum disclosure requirements to ensure transparency.
Why Does This Matter?
For investors, the new labels aim to bring much-needed clarity and consistency to sustainable finance, making it easier to understand what’s green and what’s not. For asset managers, the proposed system could help streamline compliance and reduce regulatory uncertainty across different jurisdictions.
Additional Considerations
On top of these new categories, financial products will need to comply with the European Securities and Markets Authority’s (ESMA) guidelines on fund naming. These guidelines impose stricter requirements on the use of sustainability-related terms such as “impact,” “social,” “governance,” and “environmental” in fund names.
What’s Next?
The European Commission will now consider the Platform’s recommendations as part of its wider review of SFDR. If implemented, the changes could reshape how sustainable finance products are labelled and sold across Europe, making it easier for both retail and institutional investors to make informed choices.
Stay tuned as the EU continues to fine-tune its approach to sustainable investing and ensure a more transparent financial ecosystem for all.
