EU Parliament Draft Proposes Mandatory PAI Disclosures and Stricter ESG Fund Labelling

A new European Parliament draft report on the Sustainable Finance Disclosure Regulation (SFDR) proposes mandatory Principal Adverse Indicator disclosures and engagement strategy reporting for products using the Commission's proposed new sustainability fund categories. The draft, filed by Rapporteur MEP Gerben-Jan Gerbrandy, also proposes a disclaimer requirement for products that reference sustainability but do not use a formal label under the new categorisation system.

The EU Commission proposed a new three-category system for financial products making ESG claims — 'Sustainable,' 'Transition,' and 'ESG Basics' — as part of its SFDR review, replacing the widely criticised Article 8 and Article 9 regime. The Parliament's draft report supports this framework as a starting point but proposes mandatory PAI indicator disclosures for products using any of the three categories, allowing investors to compare products within each category. A 'comply-or-explain' approach is proposed for disclosures describing the engagement strategy of the financial market participant.

The draft also proposes a new requirement for ESG Basics products to exclude at least 20% of the lowest sustainability-rated securities relative to the investment universe or benchmark — a provision designed to ensure that even the lowest-tier ESG label carries a meaningful minimum investment standard. A disclaimer for products that refer to sustainability factors without using a formal category label is intended to reduce the risk of greenwashing by making clear to retail investors that such products do not meet EU sustainable product standards.

The draft report will be presented to the Parliament's Economic and Monetary Affairs committee in June, with a vote on the proposals scheduled for mid-July. If adopted, the revised SFDR framework will shape how ESG funds are marketed and labelled across the EU, with significant implications for Indian asset managers and companies seeking to attract European sustainable investment flows. The final legislation will also influence how sustainability disclosures are structured for Indian issuers listed on international exchanges.

Key figure — Vote on EU Parliament's SFDR proposals scheduled for mid-July 2026