The European Commission’s proposal to revise the Sustainable Finance Disclosure Regulation (SFDR), unveiled today, risks weakening the foundations of sustainable and transition finance and undermining efforts to align investments with the EU’s climate and environmental objectives.
“The Commission’s categories look structured on paper but lack the safeguards needed to add real value. If financial products with minimal ambition can qualify and fossil fuel expansion is not fully excluded, then the SFDR will continue to mislead investors and fail to mobilise the investments needed for the EU 2030 climate and environmental goals. This approach will also be unable to truly contribute to the Savings and Investment Union”, said Thibault Girardot, Sustainable Finance Policy Officer at WWF European Policy Office.
Instead of providing clarity and guiding investors towards options with real environmental and social impact, the three-tier categorisation system introduced in the proposal¹ relies on criteria too weak to achieve this goal. With minimal safeguards against companies tied to environmentally harmful activities and no mandatory positive criteria for selecting sustainable companies, even low-ambition products can qualify. The ESG basics category is especially problematic: as a broad catch-all without a sunset clause, it risks becoming a permanent refuge for funds seeking an ESG label without meeting robust standards, risking diverting money from more ambitious categories.
The lack of a clear disclaimer for non-categorised financial products increases the risk that investors unknowingly select funds that disregard sustainability. The Commission ignores established market norms and risks discouraging good practices. Although 85% of large investors have formal policies for engaging with investee companies to improve their sustainability performance, the proposal makes it optional in the transition category only.
On the bright side, the proposal adds an optional ‘impact’ feature for transition and sustainable products, detailing how these impacts will be measured, managed and reported on. It also defines impact-oriented products. “This acknowledges that around half of retail investors want measurable real-world environmental impact. While a standalone impact category is missing, this is a first step towards meeting demand and identifying products with genuine impact”, added Thibault Girardot.
The exclusion of fossil fuel expansion from the sustainable and transition categories is a welcome step, as is the ban of coal investments in the ESG basics. Still, oil and gas expansion remains in the ESG basics category, which undermines the climate credibility of the framework.
WWF calls on Member States and the European Parliament to overhaul this proposal and anchor the SFDR revision in science, integrity and best practice. The EU cannot afford a framework that claims to steer sustainable investment while rewarding low ambition and failing to provide investors with the sustainability information they need to make informed choices.
