SFDR 2.0 positions green bonds as ‘structural portfolio solution’, says MainStreet

The European Commission’s proposed Sustainable Finance Disclosures Regulation (SFDR) reforms could see investors increasingly turn to green bonds to build sustainable portfolios, according to analysis from sustainable investment advisory firm MainStreet Partners.

In its latest report on trends in the green, social and sustainability bonds (GSS), MainStreet analysts argue that the asset class may become a “structural” tool for fixed income and multi-asset strategies wanting to qualify as a ‘sustainable’ or ‘transition’ fund under the proposed SFDR 2.0 regime.

This will likely accelerate demand, at a time when a high volume of maturities has created “the largest reinvestment pool the market has experienced”, according to the analysts.

“We are entering a new phase where regulation, capital flows, and impact measurement are finally moving in the same direction,” said Pietro Sette, research director at MainStreet Partners, also referring to new evidence the firm found on the decarbonisation impact of financing from use-of-proceeds bonds (see below).

“If the SFDR 2.0 proposal were to go ahead as planned, it would materially change the economics of sustainable portfolio construction. Green bonds will offer one of the most efficient ways to combine regulatory alignment, diversification, and measurable climate impact.”

‘Concentration where it counts’

Key to this is a proposed 15% EU Taxonomy “safe harbour” in the Commission’s SFDR reform proposal.

According to MainStreet, while the headline requirement for “sustainable” and “transition” categories is a 70% allocation to specific assets, funds that can demonstrate a minimum of 15% portfolio alignment with the EU Taxonomy are automatically deemed in compliance with the sustainability criteria for those labels, even if the rest of the portfolio is composed of more traditional or neutral instruments (as long as they meet minimum safeguards and exclusions).

This will help fixed income and multi-asset managers meet requirements without significantly limiting diversification, the firm said.

“The efficient solution is concentration where it counts,” Sette told IPE. “A 25–30% taxonomy-aligned green bond sleeve delivers compliance, while the remaining roughly 70% can stay in traditional government bonds, credit, and multi-asset exposures needed for duration, liquidity, and liability matching.”

He added: “Forcing portfolios toward 70% ‘sustainable’ or ‘transition’ assets may instead structurally compress sovereign exposure, reduce diversification, and increase tracking error.”