The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has adopted its position for the review of the Sustainable Finance Disclosure Regulation (SFDR).
The SFDR is the EU rulebook designed to increase transparency and combat “greenwashing” in investment funds. It requires asset managers to disclose how they integrate Environmental, Social, and Governance (ESG) risks and impacts into their investment decisions. The committee proposes to narrow the scope of the law and allow investments in companies expanding fossil fuel production to be classified under the ‘transition’ category, meant for funds that help the shift to a sustainable economy.
“Climate science is largely absent from ECON’s position. They have narrowed who the rules apply to and loosened what counts as a credible transition to sustainability,” said Thibault Girardot, Sustainable Finance Policy Officer at WWF EU. “This undermines what the SFDR is meant to achieve and puts Europe’s sustainability goals at risk.”
The SFDR is the EU’s rulebook for how investment products present their environmental and social credentials. However, ECON’s opinion for the revision of the law introduced a major loophole that would significantly reduce the scope, similar to one proposed by Council in June. This would exempt investment firms from having to disclose if their products sold to professional investors are categorised under the SFDR, fragmenting the market and making it harder for investors to compare products.
This exemption assumes that professional investors are always large institutions with teams of sustainability experts able to assess sustainability credentials independently. In practice, this is often not the case. Professional investors can also be small local pension schemes, many of which rely on common standards like the SFDR because they lack the resources to verify sustainability claims.
On the criteria for the SFDR transition category, the committee largely agrees with the Council’s proposal. This would allow the inclusion of companies expanding fossil fuel production and set arbitrary criteria requiring fossil fuel companies to direct 20% of their annual investments towards green activities aligned with the EU Taxonomy.
“Companies opening new oil and gas fields or building new coal plants have no place in a category designed to help Europe shift to a sustainable economy,” added Girardot. “The SFDR is meant to reduce greenwashing, but if policymakers continue on the current trajectory, it will only make it harder for investors to identify companies moving away from coal, oil and gas.”
However, ECON’s position includes one key condition that goes beyond the Council’s text, as it requires fossil fuel companies in transition funds to invest more in green activities than in new fossil fuel projects over a rolling period of three years. The text also includes some improvements, such as requiring investment firms to annually publish the share of their funds and financial assets falling under each SFDR category, making comparisons easier.
The ECON committee has a negotiation mandate for the inter-institutional negotiations (trilogues), which are expected to start in October. WWF calls on EU policymakers to ensure the final SFDR framework applies across the entire market and excludes companies expanding fossil fuel production from the transition category. Only a science-based framework can provide investors with clear and comparable sustainability information.
