Asset Management & Investment Funds ESG Newsletter: October 2024 – January 2025

Key dates

Sustainable Finance - ESG Developments

Highlights during the period

In this quarterly edition of the Walkers ESG newsletter, we identify a number of key highlights during from European legislative and regulatory developments and advances in the global sustainable finance framework more broadly.

Platform on Sustainable Finance: Report on Categorisation of products under SFDR

The Platform on Sustainable Finance (the "Platform") published a report on the 'Categorisation of Products under SFDR' as part of the Commission's review of the functioning of the SFDR and different interpretations by national competent authorities ("NCAs"), auditors, and lawyers. While the proposal in the report is both high level and not binding on the Commission, the proposal outlines the categorisation scheme and considerations that the Platform recommends the Commission implement as part of the SFDR review process for the benefit of all investors.

The Platform on Sustainable Finance (the "Platform") published a report on the 'Categorisation of Products under SFDR' as part of the Commission's review of the functioning of the SFDR and different interpretations by national competent authorities ("NCAs"), auditors, and lawyers. While the proposal in the report is both high level and not binding on the Commission, the proposal outlines the categorisation scheme and considerations that the Platform recommends the Commission implement as part of the SFDR review process for the benefit of all investors.

More details can be found under section 1.2 of this newsletter.

ESMA Q&A on Fund Name Guidelines

ESMA published Q&As with further details on specific aspects of the Fund Names Guidelines. ESMA published three new questions which provided some clarification on some of the key elements within their Fund Names Guidelines. The Q&A centred around;

1. applicability of Eu Paris-Aligned Benchmarks or EU Climate Transition Benchmarks (together, the "PAB/CTB criteria") to Green Bonds/ use of Proceeds Bonds,
2. defining "Meaningfully" investing in sustainable investments, and
3. clarifying what is included with "Controversial weapons".

More details can be found under section 1.3 of this newsletter.

Central Bank's notice of intention on Fund Names Guidelines

The Central Bank markets update (issue 9) includes the Central Bank's notice of intention for full compliance with ESMA's Fund Names Guidelines.

More details can be found under section 1.4 of this newsletter.

Central Bank follow-up SFDR workshop

The aim of this workshop was to discuss sustainability related disclosures under SFDR as well as the Fund Names Guidelines and ESMA's CSA on sustainability related disclosures and the integration of sustainability risks. The member note summarises discussions on a number of Central Bank expectations for SFDR disclosures.

More details can be found under section 1.5 of this newsletter.

ESG Ratings Regulation

In mid-December, the ESG ratings regulation (EU) 2024/3005 was published in the official journal of the EU (the "OJ") and will take effect from 2 July 2026. ESG rating providers within the EU will need to be authorised and supervised by ESMA. Providers are required to notify ESMA by 2 August 2026 to be able to continue operating in the EU and are required to apply for authorisation or recognition by 2 November 2026.

More details can be found under section 4.2 of this newsletter.

ESMA sustainable finance implementation timeline

ESMA published its most recent sustainable finance implementation timeline.

More details can be found under section 4.6 and the timeline itself can be found on page 16.

SFDR-related Developments

Platform Report on Transition Plans

On 22 January 2025, the Platform published its latest report on corporate transition plans entitled 'Building trust in transition: core elements for assessing corporate transition plans'.

The report identifies core elements for evaluating corporate transition plans, offering recommendations to the Commission for enhancing the effectiveness of its policy framework and supporting the market to provide and access transition finance while addressing risks of greenwashing.

Key takeaways from the report include practical guidance for financial institutions to assess corporate transition plans based on four key elements:

• science-based and time-bound targets;
• key levers and actions to achieve these targets;
• financial planning; and
• governance of the plan and its implementation.

The report notes that for the purposes of transition finance, corporate transition plans have become essential in helping turn high-level climate and environmental targets into actionable strategies and investment plans that can be clearly communicated to financial market participants. Section 2 in the report provides a summary of existing EU requirements relating to transition plans.

Platform Report on Categorisation of products under SFDR

On 17 December 2024, the Platform published a report on the 'Categorisation of Products under SFDR', taking into account the stated need for simplification and streamlining of EU sustainable finance disclosure regulations and outlining key considerations for the Commission as part of its SFDR review.

The report aims to ameliorate inconsistencies in approach throughout the EU in respect of the categorisation of products under SFDR which have arisen as a result of varying national labelling regimes and different interpretations by NCAs, auditors, and lawyers. While the proposal in the report is both high level and not binding on the Commission, the proposal outlines the categorisation scheme and considerations that the Platform recommends the Commission implement as part of the SFDR review process for the benefit of all investors including retail. The proposal takes due consideration of the need for a smooth transition from the existing disclosure regime including the potential impact on existing offerings, the SFDR implementation efforts and the benefits to all investors including in relation to their sustainability preferences and the basis on which investors have invested in such products.

The Platform recommends categorising products with the following sustainability strategies:

• Sustainable: adherence to a share of EU taxonomyaligned Investments or Sustainable Investments with no significant harmful activities adhering to the exclusion criteria, or assets based on a more concise definition consistent with the EU Taxonomy Regulation ((EU) 2020/852) (the "Taxonomy").
• Transition: foster the transition to a net zero and an overall sustainable economy by 2050 and milestones in line with the EU goals through investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock-ins, per the Commission's Transition Finance guidelines.
• ESG collection: (select or exclude sectors or companies based on ESG performance) through investments excluding significantly harmful investments / activities, investing in assets with better environmental and/or social criteria or applying various sustainability features. The Platform notes that funds of funds, while eligible for any of the categories, will likely be most suited to the ESG collection category.
• All other products should be identified as unclassified products. In relation to unclassified products, the Platform proposes that unclassified products should still be required to report on Taxonomy-alignment and PAI greenhouse gases ("GHG") emissions.

The Platform proposes a number of criteria and reporting requirements for each of the above categories but does not propose any actual thresholds for the percentage of investments which must meet those minimum criteria. The proposal acknowledges the need for "identifying approaches to address different asset classes, investment strategies and types of products" which suggests that various assets classes and products may be subject to specific thresholds.

The proposal outlines mandatory minimum criteria with an underlying selection of binding elements that could meet these criteria, along with potential indicators. Financial market participants ("FMPs") should identify the binding elements relevant to their products, determine their specific details, and select the indicators they will use for measurement. Products within the relevant categories will be subject to pre-contractual disclosure and periodic reporting requirements. Unclassified products will not be subject to pre-contractual disclosure requirements, although it is proposed that they be subject to the periodic reporting report of Taxonomy-alignment and PAI GHG emissions as outlined above.

The Platform does not include an "Impact" category noting that there is no common definition of the term and recommending that the Commission develop a common understanding of how impact investing relates to the SFDR and the Taxonomy.

Before setting specific thresholds for the categories, the Platform recommends conducting further analysis on the potential impact of thresholds for all SFDR products. Additional next steps should comprise identification of sources, collection and analysis of data for SFDR products other than liquid funds, in particular insurance and pension products, as well as private market funds, analysis of the different potential thresholds and identification of approaches to address different asset classes, investment strategies, and types of products.

The Platform also proposes changes to the rules regarding the collation of sustainability preferences from investors. Under the MiFID II Directive (2014/65/EU), where a client indicates that they have sustainability preferences, an EU investment firm or asset manager will only be able to recommend certain categories of product to that client which are consistent with the sustainability preferences confirmed by the relevant investors. Sustainability preferences are the minimum proportion which the client wishes to invest in products which make Taxonomy aligned or sustainable investments under SFDR, or in products that consider PAIs under SFDR. In this regard, the Platform proposes amendments such that investors are asked broader and more general questions in order to more easily determine their sustainability preferences to which the relevant product or service should correspond and that these should be consistent with the relevant product categorisation as set out above (i.e., Sustainable, Transition, ESG Collection).

Finally, it should be noted that the Platform's proposal does not contain significant detail on any specific disclosure or naming provisions and as such does not contemplate significant changes to the disclosure rules under SFDR. The Platform has emphasised the importance of category names only being attached to products that qualify for that categorisation. The report notes the proposed categorisation scheme leverages the positive elements of the SFDR and the broader sustainable finance framework. Categories would have precise minimum criteria, clearly defined objectives, and measurable performance indicators. Products within these categories should measure and disclose their sustainability performance.

This report is intended to serve as the basis for the Commission to build a complete and detailed categorisation scheme. The report urges the Commission to consider strong interlinkage with investors sustainability preferences, a seamless transition by streamlining existing elements of the SFDR and the wider sustainable finance framework, in particular indicators used to measure sustainability and the potential implications of introducing a new categorisation system on existing financial products.

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