EU Parliament Draft Tightens ESG Fund Labels Under SFDR Review

New SFDR draft amendments would require mandatory Principal Adverse Impact indicators for labelled sustainable funds, improving comparability across EU financial products.
Funds using sustainability references without an EU category would need a retail investor disclaimer stating they do not meet EU standards for sustainable financial products.
ESG Basics funds would face a tougher screening test, excluding at least 20% of the lowest-rated securities before claiming ESG outperformance.

Parliament Pushes For Stronger ESG Fund Standards

Brussels is moving closer to a tougher labelling regime for sustainable investment products, as the European Parliament weighs amendments that could reshape how asset managers market ESG funds across the bloc.

A draft report filed by Rapporteur MEP Gerben-Jan Gerbrandy proposes stricter transparency, comparability and investment rules under the review of the Sustainable Finance Disclosure Regulation. The draft will help define Parliament’s negotiating position on the European Commission’s proposed SFDR overhaul.

The Commission’s reform aims to replace the current system with clearer categories for financial products making sustainability claims. The proposed labels are Sustainable, Transition and ESG Basics. Each is intended to help investors understand what a product is trying to achieve and how its ESG claims are supported.

The draft report backs that approach, but pushes for stronger safeguards. In its explanatory statement, the rapporteur writes: “Reliable transparency on the sustainability of financial products is a conditio sine qua non to create a financial framework in which investors can choose to invest in financial products with environmental, social and governance (ESG) ambitions.”

Mandatory PAI Disclosure Moves Back Into Focus

One of the most important changes is the proposed use of mandatory Principal Adverse Impact indicators for products using the new SFDR categories.

Under the draft, financial market participants would need to disclose a limited set of PAI indicators. These would allow investors to compare financial products within each category. The report also proposes that firms complement those indicators with other material PAIs, while allowing voluntary indicators where relevant.

This would raise the burden on asset managers that use EU sustainability categories. It would also give institutional investors a clearer basis for due diligence. For fund selectors, pension trustees and wealth platforms, the change could reduce reliance on vague ESG claims and sharpen scrutiny of product-level risks.

The draft also calls for financial market participants to disclose their sustainability-related engagement strategies. Firms would need to explain how those strategies align with the objectives of the product, or provide a clear and reasoned explanation for not pursuing one.

That proposal matters for governance. It shifts the focus from portfolio construction alone to stewardship, escalation and accountability.

Unlabelled Products Would Need A Disclaimer

The draft report also targets products that reference sustainability factors but do not fall under one of the new EU categories.

For these products, the rapporteur proposes a disclaimer confirming that the financial product “does not meet the EU standards for defining sustainable financial products and protecting against greenwashing.”

That wording could affect how funds are named, sold and explained to retail investors. It would also put pressure on distributors and advisers to distinguish between products with EU sustainability categories and products that only include limited ESG information.

The current SFDR regime has long been criticised for allowing Article 8 and Article 9 disclosures to function as informal labels. That has created confusion in the market, especially where investors assume that Article 9 funds are fully sustainable or that Article 8 funds strongly integrate ESG factors.

The Parliament draft seeks to correct that gap. The message is clear: sustainability language may still be used, but EU labels would carry higher evidentiary weight.

ESG Basics Faces A 20% Exclusion Test

The draft also proposes a tougher bar for the ESG Basics category.

Under the Commission’s proposal, ESG Basics would cover products that integrate ESG approaches but do not meet the Sustainable or Transition criteria. These could include best-in-class strategies or exclusion-based products.

The Parliament draft would require these products to eliminate at least 20% of the lowest-rated securities before claiming ESG outperformance against an investment universe or benchmark. The same 20% test would apply where the fund outperforms based on a specific sustainability indicator.

That change would make ESG Basics less of a light-touch label. It would also reduce the risk that marginal ESG screening is marketed as meaningful sustainability integration.

The rapporteur’s statement is direct: “The ‘ESG basics’ can be enhanced by requiring investments to outperform the average investment universe, reference benchmark, or average rating, after eliminating at least 20% of the lowest values for the chosen indicators or ratings.”

Finance Leaders Face A New Disclosure Baseline

For asset managers, the draft points to a more disciplined SFDR regime. Product teams may need to reassess naming, documentation, benchmark use, engagement processes and data controls.

The draft also proposes raising the safe harbour threshold for taxonomy-aligned activities from 15% to 20% for relevant Sustainable and Transition products. It notes that this condition is already met by 44.1% of current Article 9 funds.

Implementation timing is also under review. The draft proposes that the regulation apply 24 months after entry into force, while some burden-reduction measures would apply from the date of entry into force.

The report is expected to be presented to Parliament’s Economic and Monetary Affairs committee in June, with a vote scheduled for mid-July.

For global investors, the debate matters beyond Europe. SFDR has become a reference point for sustainable finance rules worldwide. A clearer EU labelling system could influence fund design, disclosure norms and greenwashing enforcement across markets. The political test now is whether lawmakers can simplify ESG reporting while making sustainability claims harder to overstate.