Agefi Luxembourg - février 2025

Février 2025 27 AGEFI Luxembourg Fonds d’investissement Naturally different. linklaters.lu 31 Offices 3000 Lawyers SCAN THE QR CODE TO WATCH THE VIDEOS AND EXPLORE THE FUTURE OF ELTIFS TODAY. ELTIF 2.0 the foundation of long-term growth Stay ahead in the evolving investment landscape with our ELTIF 2.0 video series. Featuring expert insights from Linklaters investment funds team, these short, impactful videos cover key aspects of ELTIFs, from regulatory updates to strategic opportunities. By Dara INGALLO, senior knowledge lawyer and Lisa KLEMANN, counsel, funds and asset management, A&O Shearman T he Sustainable Finance Disclosure Regulation (SFDR) has been a corners- tone of the EU’s efforts to pro- mote transparency in sustainable finance. As SFDR undergoes its sche- duled review, the EU Platform on Sustaina- ble Finance (the Plat- form), an advisory body to the Commission, pu- blished a set of recom- mendations (1) to enhance the SFDR, in December 2024. These recommendations follow the Commis- sion’s public and targeted consultations on SFDR in September 2023, which identified key issues, such as unclear legal concepts, limited relevance of certain disclosures, and data avail- ability problems. The targeted consultation con- sidered two options as alternatives to the existing disclosure framework: (i) converting the disclosure regimes into categories or (ii) creating categories based on the strategy. The Platform retains the categorisation of products based on their sustainability strategies. 1. New product categories The proposed categories are: a) Sustainable products : These products are largely considered sustainable and must con- tribute to specific environmental or social objec- tives through: - EU Taxonomy-aligned investments; or - sustainable investments ( SI ) under a strength- ened definition under SFDR, with no significant harmful activities or assets. The Platformsuggests that only the Taxonomy ex- clusively defines activity-based environmentally sustainable investments for all the eligible activi- ties. For activities not yet included in the Taxon- omy, investments may qualify as SI under SFDR. As the Taxonomy expands for other activities, the scope of SI under SFDR narrows. The SI defini- tion under SFDR should align with the Taxon- omy, meaning activities already captured by the Taxonomy cannot be considered an SI under SFDR unless they meet the Taxonomy’s technical screening criteria. b) Transition products: these products support the transition to a net zero and a sustainable economy by 2050, avoiding carbon lock-ins, in line with the Commission’s recommendations on facilitating fi- nance for the transition to a sustainable economy. These productswould invest in companies or spe- cific projects with environmental transition objec- tives, either thosewith a specific transition plan to transform their activities (which may or may not be alignedwith the Taxonomy) or those that have more broadly adopted science-based targets. These products could also commit to make envi- ronmental improvements at the level of thewhole portfolio or for individual companies or projects. c) ESG collection products : these products ex- clude significantly harmful investments or activ- ities, and invest in assets with better environmental and/or social criteria or apply various sustainability features. These products would select or exclude sectors or companies based on ESG performance, or select invest- ments for their potential to improve their sus- tainability performance, either by comparison to a benchmark or by showing year-on-year im- provement. d) Unclassified products : Other products that do not fit into any of the three categories, would be unclassified, and would face some restric- tions on their marketing and disclosure of ESG characteristics. The Platform recognises that professional or institutional investors, who usu- ally understand sustainability information, may have different needs. Products may therefore not be required to be categorised even if they meet the criteria of one category. 2. Minimum criteria of each category The Platform outlines the minimum criteria, in- dicators, pre-contractual disclosure and report- ing requirements for each category, as well as the considerations for multi-option products, funds of funds and similar products. The table below summarizes those requirements: 3. Scope of categorisation The Platform recommends that the Commission evaluates whether the scope of the categorisation should extend beyond the current SFDR. This includes consideringwhether all products and services subject to the sustainability preferences in the Insurance Distribution Directive or MiFID should be categorised. Furthermore, the Platform suggestsdevelopingacom- monunderstanding of im- pact investing within the EU sustainable finance framework and how it re- lates to theEUTaxonomy to determine its integration into the categorisation scheme. Impact investing, which aims to generate positive social and environmental impactsalongsidefinancialreturns,hasbeengaining traction in recent years. Integrating impact investing intotheSFDRframeworkwillhelpstandardiseprac- tices and promote greater transparency in this area. 4. Implications for investors and financial market participants The proposed categorisation scheme is expected to enhance transparency and comparability of sus- tainable financial products. By aligning strategies with investor’s sustainability preferences and pro- viding minimum criteria, investors should easily identify the products thatmatch their sustainability preferences. The Platform recognises that the cur- rent rules for investment advisers to check their clients’ sustainability preferences under SFDR and MiFID II are complex and difficult to understand for investors, as they are based on specific indica- tors such as the minimum proportion of Taxon- omy-aligned or SI investments. The Platform recommends asking more thematic andgeneral questions toestablish investors’ sustain- abilitypreferences, suchaswhether their investment shouldcause ameasurablepositiveoutcome, not in- vest in activities or assets that are harmful, invest in activities that canalreadybe consideredsustainable, or support the transition to a sustainable economy. 5. The need for clear definitions and criteria The report acknowledges that the categorisation scheme should be grounded in the sustainability strategy of the financial product and build on the existing EU sustainable finance framework, using tools such as the Taxonomy, EU Climate Bench- marks, EUGreenBondStandards, principal adverse impact indicators, and the Commission’s recom- mendations on facilitating finance for the transition to a sustainable economy. The Platform acknowl- edges that the categorisation scheme should ensure investor protection, clarity, accountability and am- bition, and avoid creating an unintentional hierar- chy or ranking between different categories. The Platform also address several challenges and gaps in the current framework: - definition of SI : the categorisation should align closely with the Taxonomy, which provides clear technical screening criteria (see 1 above). The Plat- formsuggests revisiting the definitions of sustain- ability and sustainable objective across the sustainable finance framework to ensure clear and consistent definitions and a common understand- ing of key concepts among market participants. - definition of impact investing (see 3 above); - definition of social taxonomy : the Platformsuggests developing a social taxonomy, which would clas- sify economic activities based on their social sus- tainability. The categorisation scheme should be adaptable and flexible to accommodate scientific advance- ments, market developments, innovation and dif- ferent asset classes, investment strategies and types of products. The Platform therefore calls for further development and refinement of the pro- posal, as well as testing, consultation and impact assessment on existing products and disclosure regimes, before adopting the categorisation scheme. The Platform suggests that the Commis- sion should provide for a smooth transition and a grandfathering clause for existing products that may not fit into the new categories or may need to adjust their sustainability features, aswell as the need for interim disclosure. Conclusion The Platformrepresents a significant step towards developing a common categorisation scheme for sustainable financial products in the EU, which could enhance the effectiveness and consistency of the SFDR. This reflects the growing demand and expectations from investors and regulators for more clarity, transparency and accountability in sustainable finance. However, the Platform also acknowledges the complexity and challenges of designing and implementing such a scheme, and the need for further work and consultation to en- sure its feasibility, acceptance and impact. The proposal remains high-level and further work is required to define or refine thresholds, indicators and data based on real-world testing, impact as- sessment, stakeholder feedback andmarket accep- tance. Although the report of the Platform is not binding on the Commission, it is expected to sig- nificantly influence the SFDR review proposal, due in the first half of 2025. The SFDR reviewmay have significant implications for existing financial products disclosing under Article 8 or 9 of SFDR. Financial market participants should monitor these regulatory changes and be prepared to adapt their products accordingly. 1) Categorisation of products under SFDR : proposal of the Platform on Sustainable Finance, 17 December 2024 SFDR Review: Recommendations from the EU Platform on Sustainable Finance Category ȱ Minimum ȱ threshold ȱ Binding ȱ elements ȱ Reporting ȱ Sustainable ȱ Minimum ȱ proportion ȱ of ȱ Taxonomy Ȭ aligned ȱ or ȱ SI ȱ assets, ȱ increasing ȱ over ȱ time ȱ as ȱ the ȱ Taxonomy ȱ develops ȱ ȱ Any ȱ other ȱ assets ȱ should ȱ not ȱ undermine ȱ the ȱ sustainability ȱ objective. ȱȱ PABs ȱ exclusions ȱ with ȱ adjustments ȱ Taxonomy Ȭ alignment ȱ share, ȱ SI ȱ share, ȱ relevant ȱ PAI ȱ indicators ȱ Transition ȱȱ Minimum ȱ proportion ȱ of ȱ transitioning ȱ assets, ȱ credible ȱ transition ȱ pathways ȱ or ȱ plans ȱ ȱ Any ȱ other ȱ assets ȱ should ȱ not ȱ undermine ȱ the ȱ transition ȱ objective ȱȱ Binding ȱ criteria, ȱ such ȱ as ȱ reduction ȱ on ȱ portfolio ȱ level ȱ at ȱ least ȱ in ȱ line ȱ with ȱ regulatory ȱ standards, ȱ investments ȱ tracking ȱ CTBs/PABs, ȱ committed ȱ Taxonomy Ȭ aligned ȱ CapEx ȱ or ȱ transitional ȱ activities ȱ or ȱ investments ȱ in ȱ companies ȱ with ȱ a ȱ climate ȱ transition ȱ plan ȱ or ȱ science Ȭ based ȱ targets ȱ ȱ Maximum ȱ percentage ȱ of ȱ assets ȱ not ȱ transitioning ȱ but ȱ with ȱ credible ȱ engagement ȱ strategy ȱȱ ȱ CTB ȱ exclusions ȱ with ȱ adjustments ȱ GHG ȱ emission ȱ reductions, ȱ Taxonomy Ȭ alignment ȱ share, ȱ relevant ȱ environmental ȱ and ȱ social ȱ PAIs ȱ ESG ȱ Collection ȱȱ Minimum ȱ proportion ȱ adhering ȱ to ȱ one ȱ or ȱ more ȱ material ȱ sustainability ȱ features, ȱ such ȱ as ȱ a ȱ certain ȱ percentage ȱ better ȱ than ȱ the ȱ reference ȱ benchmark ȱ or ȱ investable ȱ universe, ȱ an ȱ effective ȱ reduction ȱ of ȱ investment ȱ universe ȱ of ȱ at ȱ least ȱ a ȱ certain ȱ percentage, ȱ or ȱ investments ȱ that ȱ are ȱ eligible ȱ for ȱ the ȱ Sustainable ȱ or ȱ Transition ȱ category. ȱȱ ȱ Any ȱ other ȱ assets ȱ should ȱ not ȱ undermine ȱ the ȱ ESG ȱ characteristics ȱȱ CTBs ȱ exclusions ȱ with ȱ adjustments ȱ Taxonomy Ȭ alignment ȱ share, ȱ relevant ȱ environmental ȱ and ȱ social ȱ indicators ȱ Unclassified ȱȱ N/A ȱ N/A ȱ Taxonomy Ȭ alignment, ȱ PAIs ȱ : ȱ GHG ȱ emissions, ȱ carbon ȱ footprint, ȱ GHG ȱ intensity, ȱ HNGPs (2) . ȱ