𝗧𝗵𝗶𝘀 𝗮𝗿𝘁𝗶𝗰𝗹𝗲 𝘄𝗮𝘀 𝘄𝗿𝗶𝘁𝘁𝗲𝗻 𝗯𝘆 𝗜𝗻𝘁𝗲𝗴𝗿𝘂𝗺 𝗘𝗦𝗚 𝗙𝗼𝘂𝗻𝗱𝗲𝗿 𝗮𝗻𝗱 𝗖𝗘𝗢 𝗦𝗵𝗮𝗶 𝗛𝗶𝗹𝗹.

Another legislative proposal, missed over the festive period, was the publication of a PSF report on categorising sustainable funds (click here to read the full report).

The PSF (Platform of Sustainable Finance) was mandated by the European Commission to advise it on making the SFDR (Sustainable Finance Disclosure Requirement) more effective.

Asset Managers are using terms like ‘Article 8’ as a product label, and the EC doesn’t like that - it argues Article 8 is a set of disclosure requirements, not a fund categorisation.

 So the PSF has recommended that ‘SFDR 2.0’, as many now call it, creates 4 new fund categories:

1. Sustainable 💚

These funds make taxonomy-aligned investments, or sustainable investments with no significant harmful activities, and also apply the Paris-Aligned Benchmark exclusions.

2. Transition 🌱

These funds make investments which support the transition to net zero and a sustainable economy, in accordance with the EC’s June 2023 recommendations on ‘financing the transition to a sustainable economy’.

3. ESG collection 📊

These funds would exclude investments in significantly harmful activities, and invest in assets with higher-scoring environmental and/or social characteristics.

Funds in categories 1, 2 and 3 would be subject to minimum criteria, meaning at least x% of the fund’s investments must demonstrably meet this or that requirement. These % values are yet to be proposed and they are also subject to minimum disclosure requirements. 

4. Unclassified ❓

A fund that does not fall within one of the 3 categories above would be labelled as ‘unclassified’.

Category 4 funds are not subject to minimum criteria, and may not use ESG/sustainability terms in their marketing material within the EU.

But unclassified funds are subject to minimum disclosures.

This would create a significant headache for most managers of ‘Article 6’ funds, and other funds that do not claim to incorporate ESG characteristics.

Minimum disclosures for an unclassified fund include:

📝 % of the investments’ revenues and capex aligned to the EU Taxonomy 

📝 PAIs (Principle Adverse Indicators) 1, 2 and 3 (Greenhouse Gas emissions, footprint and intensity)

📝 PAI 10 (violations of the UNGC and OECD guidelines, although PSF recommends amending this to violations of the UN Guiding Principles, to focus on human rights)

What is the timeline here?

There is in our view no chance that these changes will come into force in 2025.

But given the PSF’s track record in influencing EC legislation, and the general market confusion over SFDR, we do think it very likely that these recommendations will be legislated in 2026, and perhaps brought into legal force in 2027. 

So asset managers who distribute their funds in the EU, but do not map their funds to any of the PAIs, do not need to panic. But they should start planning for how they will meet these minimum disclosures.

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𝗪𝗵𝗮𝘁 𝗱𝗼 𝘆𝗼𝘂 𝘁𝗵𝗶𝗻𝗸?

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