For those who have followed our guidance on Sustainable Finance, the Platform on Sustainable Finance (PSF) will likely be a familiar entity. PSF is an expert advisory body that provides strategic advice to the European Commission on sustainable finance matters, helping shape the framework and policies that drive environmentally responsible financial practices across the EU. Over the past few weeks, PSF issued their latest recommendations, which build on the outcomes of consultations that concluded in December 2023. These recommendations focus on streamlining disclosure and improving categorization of sustainable finance products, offering a more practical and user-friendly approach for market participants.
At the heart of the EU’s sustainable finance agenda is the EU Taxonomy, a classification system established as part of the EU Action Plan on Sustainable Finance. The Taxonomy provides a framework to classify economic activities that make a substantial contribution to at least one of six defined environmental objectives while ensuring they Do No Significant Harm (DNSH) to the other objectives. These six objectives are: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.
While the EU Taxonomy has been instrumental in setting a baseline for sustainability, PSF has proposed an evolution of this approach. They recommend transitioning to a simplified system that categorizes financial products under three sustainability strategies:
- Sustainable: Investments that directly contribute to sustainability through Taxonomy-aligned activities or sustainable investments without significant harmful activities.
- Transition: Investments or portfolios that support the broader transition to a net-zero and sustainable economy. These include activities that, while not yet fully sustainable, are on a credible pathway toward alignment.
- ESG Collection: Products that avoid significantly harmful activities while prioritizing assets with stronger environmental or social performance and incorporating various sustainability features.
This reimagined categorization aims to reduce complexity and enhance clarity for investors and stakeholders, making it easier to identify and support financial products aligned with specific sustainability goals.
The European Commission will evaluate the PSF’s proposals as part of its broader assessment of the Sustainable Finance Disclosure Regulation (SFDR) framework. This review process is a critical opportunity to refine the regulatory landscape, with the Commission’s initial findings expected to be published in the second or third quarter of 2025. The outcome of this assessment could significantly influence the trajectory of sustainable finance within the EU, making it a development to watch closely.