Members of European Parliament (MEPs) have today signed off on a provisional negotiating position for the Sustainable Finance Disclosure Regulation (SFDR).
The parliament’s Committee on Economic and Monetary Affairs (ECON) voted through what one industry body called “a pragmatic, workable” position, which would see it push for more flexibility around sovereign bonds, carve-outs for certain funds, and more transparency on engagement strategies.
Specifically, alternative investment funds would be allowed to opt-out of the SFDR categorisation framework altogether if they can demonstrate they only target professional investors.
ECON has also made significant changes to the European Commission’s proposed approach to the ‘Transition Category’, including rejecting the blanket ban on investing in fossil fuel expansion.
Instead, it says companies that make money from new fossil-fuel projects can be included in Transition funds if they allocate 20% of their capital expenditure to activities under the EU’s green taxonomy, have time-bound decarbonisation commitments, and spend more on green activities than fossil fuels over a three-year period.
Parliament wants to strengthen the requirements around engagement, too.
The Commission proposal suggests engagement is one approach to support the transition, but ECON wants all transition-labelled funds to explain their engagement strategies and how they’re being implemented.
Financial institutions would also have to disclose the proportion of their overall assets under management that qualify for a label under SFDR 2.0, to give a clearer sense of how seriously they are considering and financing sustainability more broadly.
The European Fund and Asset Management Association (EFAMA) praised Parliament for acknowledging that some sovereign bonds support the climate transition, and should therefore be allowed to represent up to 15% of eligible assets in the Transition category.
“Today marks an important step forward for the EU’s sustainable finance framework,” EFAMA said in a statement, describing Parliament’s position as “pragmatic” and “workable”.
Other groups have been less positive about the outcome of the ECON vote.
Emily Ahmed, a senior EU policy manager at campaign group ShareAction, said it sent “mixed signals” to the market.
“While MEPs have backed greater transparency on how investors steward their investments to drive the real-world change we need, Parliament has retreated in significant areas that could undermine confidence in sustainability-related investments,” she said.
Significant gaps remain
Eurosif, the pan-European sustainable finance association, welcomed some of the changes but warned that significant gaps remained. It highlighted stronger product-level Principal Adverse Impact indicators, disclaimers for non-categorised products and the restoration of targeted entity-level disclosures, while criticising the proposed opt-out for alternative investment funds marketed exclusively to professional investors.
It also raised concerns about the revised Transition category, arguing that the criteria could allow companies with fossil-fuel expansion plans to qualify despite investing in green activities.
“The transition category must enable investors to identify companies genuinely transforming their business models – not those making isolated green investments while continuing to expand fossil-fuel activities,” said Aleksandra Palinska, executive director of Eurosif.
“Eligibility should be based on a company’s overall strategy and capital allocation, underpinned by a credible transition plan that is being implemented. Otherwise, the criteria risk weakening the category’s credibility while adding unnecessary complexity.”
The position has been adopted today, but there is room for it to be challenged next month when Parliament holds its next plenary session.
If that doesn’t happen, negotiations will be able to start with co-legislators from member states and the Commission.
