SFDR review: ECON Committee approves its negotiating position

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has approved its draft report and negotiating mandate on the review of the Sustainable Finance Disclosure Regulation (SFDR), marking an important step in the legislative process.

The ECON position introduces several developments that could have significant implications for the financial sector, particularly regarding the new product categorisation framework, fossil-fuel-related safeguards, Taxonomy alignment, disclosure requirements and the scope of SFDR.

Parliament supports the new product categorisation framework

ECON supports the introduction of three categories for financial products under SFDR:

• Sustainable
• Transition
• ESG Basics

The position also introduces additional requirements and safeguards, particularly for investments in companies exposed to fossil-fuel activities.

For the Transition category, Parliament’s position would exclude companies generating revenues from fossil-fuel exploration.

Products falling under the ESG Basics category would instead be required to disclose their exposure to the fossil-fuel sector.

Additional safeguards would apply to fossil-fuel investments, including conditions linked to:

• Taxonomy-aligned capital expenditure;
• emissions-reduction strategies; and
• coal phase-out plans.

ECON also proposes a 20% Taxonomy-alignment threshold for automatically meeting the positive-contribution requirement of the Sustainable category. This compares with 15% under the Council mandate.

Proposed changes to the scope of SFDR

The ECON position also includes changes to the scope of the Regulation.

At entity level, environmental and social impact disclosures would apply only to the largest financial market participants.

ECON also supports an exemption for products offered exclusively to professional investors.

In addition, financial advice and portfolio management would be removed from the scope of SFDR. Firms would nevertheless retain the ability to recommend other products that appropriately reflect clients’ sustainability preferences.

These developments could have important practical implications for banks and other financial institutions, particularly in relation to product governance, distribution processes, sustainability preferences and disclosure requirements.