The Sustainable Finance Disclosure Regulation (SFDR) adopted in 2019 triggered a vast movement of self-labelling by asset managers. Intended as a classification that would put some order in the European Union sustainable funds market, SFDR’s articles 8 and 9 quickly became a source of confusion. Both the complexity of the SFDR framework and its lack of clear minimum safeguards meant there was little added value for retail investors. On the contrary, article 8 and 9 classifications could even lead them to presume funds meet basic green credentials when this is not the case, leading to several scandals over the past years.
It is in this context that the European Commission publishes its proposal to review the SFDR. The review provides a unique opportunity to address existing gaps and loopholes through a robust SFDR 2. Such a text is essential to combat greenwashing in the financial market, but also to make European finance more attractive. Indeed, driven away by anti-climate initiatives in the U.S, asset owners are increasingly seeking asset managers and funds aligned with their priorities and values. At the same time, individual investors continue to massively seek sustainable investment options, with younger generations making it an essential priority.
- Excluding fossil fuel developers from all categories to ensure SFDR 2 credibility: Excluding fossil fuel developers – as proposed by the Commission for “sustainable” and “transition” categories – is a necessary step to prevent greenwashing and restore retail investor confidence in sustainable finance. It specifically addresses the limitations of the recent ESMA Guidelines on fund names, already exploited by asset managers to maintain green claims while supporting polluting companies. But it is also a catalyst for a clearer and more efficient SFDR, especially with the “do no significant harm” principle being pulled back.
- Clarifying what qualifies as “transition”: When defining the “transition” category, the Commission allows fund managers to use several criteria to meet the 70% threshold of assets linked to a “clear and measurable” transition objective. Yet, their vagueness leaves the door open to a vast diversity of practices that have drastically different environmental and climate impacts. Much clearer criteria are needed to avoid greenwashing in this SFDR category, and the EU can notably build on the best practices identified in the market to analyze the “transition stage” of companies.
- Strengthening overall SFDR 2 consistency: The Commission proposal includes some potentially inconsistent features that should be fixed in the final text. This includes enabling for some claims to be made on funds that do not respect the criteria set for the three categories; exempting non-categorized funds for all reporting obligations on “principle adverse impacts” (PAIs); and making it trickier for Member States to maintain pre-existing transparency rules.
