The EU’s sustainable finance framework would benefit from new measures to help reduce greenwashing risk, such as green and transition labels for sustainable investment products, and from reduced reporting burdens for smaller market participants, according to European Commissioner-designate for Financial Services and the Savings and Investment Union Maria Luis Albuquerque.

In her confirmation hearing on Wednesday, Albuquerque expressed her position that the EU’s Sustainable Finance Disclosure Regulation (SFDR) could more effectively address greenwashing risk with the introduction of a labelling regime that communicated clearly the sustainability attributes of investment products.

In 2023, the European Commission launched a comprehensive review of the SFDR framework, which aims to establish harmonized rules for financial market participants including investors and advisers on transparency regarding the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products.

The regulation currently includes classification levels for sustainability-focused investment funds, each with varying disclosure requirements, including ‘Article 8’ funds that “promote environmental or social characteristics or a combination of those characteristics,” and the more stringent ‘Article 9’ funds, “which have sustainable investment as their objective.” In its review, however, the Commission expressed concern that the Article 8 and 9 classifications were being used as de-facto sustainability quality labels, raising potential greenwashing risks.

In her confirmation hearing, Albuquerque echoed these concerns, stating:

“The framework is being misused, as a pseudo-labelling regime, and this does create greenwashing risks because there are products being marketed and sold labelled as ‘sustainable’ and we are not really sure whether they are sustainable or not. That is an issue.

“That is why if I am confirmed, I will look into the possibility of creating a proper labelling system.”

Albuquerque stated that a labelling system should create a label for green investments, as well as for transition investments, in order to support companies that would not yet meet sustainability criteria, but “who are transitioning to becoming sustainable. That is very important because that’s actually where the majority of our productive sector is.”

Albuquerque added:

“I am willing to discuss and propose a regime which is actually adequate for labelling, where the labelling of a product as sustainable or transition or whatever the label may be actually corresponds to what that product… is.

“And that obviously means setting minimum criteria, and they would have to be easily understandable and easily applicable.”

The Commissioner-designate also pledged to explore ways to help make the sustainable finance framework fit for smaller players by helping to ease reporting requirements and regulatory burdens.

“On sustainable finance, I think there is a lot we can do to make the framework more useable, to make it more proportionate for smaller companies, for smaller market participants, to correct the existing overlaps. There are overlaps, there are inconsistencies, there are probably reporting requirements which can be streamlined.”

The election by MEPs in Europe of the full college of Commissioners is scheduled to take place during the plenary session scheduled for November 25 – 28.