'Sustainable investment' is defined in Article 2(17) SFDR as 'an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance'.
It is noteworthy, the definition of sustainable investments in Article 2(17) SFDR includes both environmental and social objectives, while the Taxonomy Regulation is only limited to environmental objectives.
Recital 19 of the Taxonomy Regulation explains that the definition of ‘sustainable investment’ in SFDR includes investments in economic activities that contribute to an environmental objective which, amongst others, should include investments into ‘environmentally sustainable economic activities’ within the meaning of the Taxonomy Regulation - see the definition of environmentally sustainable investment in SFDR.
Moreover, SFDR only considers an investment to be a sustainable investment if it does not significantly harm any environmental or social objective as set out in the Taxonomy Regulation.
Hence, the definition of “sustainable investment” in SFDR when compared to the definition of “environmentally sustainable investment” in the Taxonomy Regulation can be considered an overarching definition, encompassing the latter.
As underlined by Transition finance report of the Platform on Sustainable Finance of March 2021, both definitions share some similarities, i.e.:
- focus on investment in qualifying economic activities,
- expect that an activity makes a (substantial) contribution to one or more objectives while avoiding significant harm to other objectives (social and governance objectives are not defined in the Taxonomy Regulation, but the minimum safeguards serve this purpose),
but there are also several differences:
- the SFDR definition of “sustainable investment” is a broad set of principles encompassing the widest possible range of sustainability issues, by contrast, the definition of “environmentally sustainable investment” defines six specific environmental objectives (however, financial products with an environmentally sustainable investment objective (Article 9 products) are required to disclose to what environmental objective(s) as defined in the Taxonomy Regulation the product contributes);
- while the Taxonomy Regulation requires a ‘substantial contribution’ to one or more objectives, the SFDR requires a ‘contribution’ only (this means that under the Taxonomy Regulation activities making incremental or small contributions, which may previously have been described as sustainable, do not meet the regulatory definition, activities with limited or neutral environmental footprint may also not meet the definition);
- he SFDR requires the sustainability contribution of an economic activity to be measured and disclosed using key performance indicators (KPIs) but gives flexibility to the discloser to determine the KPIs, while the taxonomy definition provides precise criteria for assessing when an activity can be considered compliant.