Parliament committee backs tighter fossil-fuel criteria for SFDR transition products

What happened

The European Parliament’s Economic and Monetary Affairs Committee has adopted a negotiating stance on revisions to the Sustainable Finance Disclosure Regulation (SFDR). The proposal supports three product groupings: Sustainable, Transition and ESG Basics.

For the planned Transition category, fossil-fuel companies could qualify only if at least 20% of capital expenditure is aligned with the EU taxonomy. They would also have to allocate more capital to sustainable activities than to new fossil-fuel developments. This goes beyond the member-state position, which retained the 20% threshold and called for a time-limited Scope 1 and 2 emissions-reduction strategy.

Financial-market participants should monitor Parliament’s vote and the subsequent talks with member states, as the final criteria could affect product design, investment selection and underlying-company reporting.

Why it matters

The committee’s approach would place a more specific investment test on fossil-fuel businesses held in Transition products. It also proposes mandatory disclosure of fossil-fuel-sector exposure for ESG Basics products.

Across all three categories, investments in companies that violate human rights or humanitarian law would be excluded. Categorised products would require due-diligence and monitoring processes subject to review at least annually. Reporting would cover fossil-fuel exposure, greenhouse-gas emissions, activities that damage biodiversity-sensitive areas, and adverse effects on a product’s ESG objectives.

Context and next steps

The European Commission’s 2023 SFDR review found that existing disclosures were lengthy and difficult to compare, and highlighted the risk that Article 8 and Article 9 disclosures were being treated as sustainability labels. The Commission subsequently proposed the new category structure.

According to ESG Today, the committee position is due for consideration by the full Parliament at the beginning of its October I plenary session. Approval would establish Parliament’s negotiating mandate for the SFDR revision.