The SFDR serves as both a transparency tool and a de facto labelling mechanism, empowering investors but necessitating detailed evaluation beyond broad classifications. Antoine Peter, senior manager at Arendt Regulatory & Consulting, explains the intricacies and challenges of navigating SFDR disclosures, highlighting the importance of understanding the nuanced differences between fund categories and the potential for misinterpretation if investors rely solely on high-level classifications.
Kangkan Halder: How does SFDR aim to address overregulation while ensuring transparency in sustainable investments?
Antoine Peter: At the product level, mandatory disclosures under the SFDR have remained relatively limited, requiring a blanket explanation of how sustainability risks are integrated into investment decisions and whether adverse impacts have been considered. Even the EU Taxonomy disclosures only require a disclaimer. However, the situation becomes more complicated when products promote environmental or social (E/S) characteristics or make sustainable investments, triggering additional transparency requirements. These requirements must be comparable and harmonised, often leading to reliance on rigid and complex templates, which can feel like overregulation.
Entity-level disclosures often overlap with product-level disclosures, resulting in seemingly repetitive information and confusion regarding the level at which specific data should be interpreted--whether at the fund level or asset manager level. Furthermore, SFDR disclosures are combined with requirements from other regulatory texts, such as the CSRD, which can lead to repetition or, in some cases, repeated disclosures that still differ in substance.
In what ways do light green (article 8) and dark green (article 9) fund classifications empower investors to make informed choices?
Article 8 and article 9 classifications are useful as they display different levels of ESG ambition from the outset and they can serve, and are in practice often used, as an initial high-level screen of an investment product’s ESG ambition.
However, they must not be viewed as an easy quick fix to allow investors to immediately ensure that their investment decisions will align with their expectations; the SFDR templates have to be read in detail and these can be lengthy and technical documents. Funds with varying levels of ambition (in terms of commitments) but also varying types of ambition (in terms of underlying ESG topics considered) will be disclosing under the same category, so investors must carry out a detailed analysis.
Some article 8 funds will consider the principal adverse impacts, others will not, some will partially commit to making sustainable investments, others will not. The landscape is much more complex and granular than the basic article 8/9 dichotomy.
Introducing more minimum rules risks hampering innovation in terms of fund and ESG strategies
What trends have you observed in fund inflows related to ESG classifications since the SFDR was implemented?
Although fund inflows into articles 8 and 9 investment products have slowed in recent years, they still account for a significant market share of 59.2%, with combined assets totalling €6trn. SFDR classifications, and more importantly, ESG labels, have played a critical role in driving these fund inflows. However, as mentioned earlier, analysing fund flows based solely on their SFDR categorisation can be misleading, as it may obscure underlying disparities.
Do you think the SFDR primarily serves as a transparency tool or a labeling mechanism, and how does this impact investor empowerment?
The current market practice is that SFDR disclosures are used as both a powerful transparency tool and a de facto labelling mechanism. This affects investor empowerment when the analysis stops at just categorisation.
What potential misunderstandings could arise for investors regarding the SFDR classifications, and how can they be addressed?
A big area for potential misunderstanding is that investors expect the funds that they have chosen to align exactly with their particular expectations and understanding of what ESG means for them and with their concerns and priority areas, even if this isn’t the case for the product they have selected. This is quite often the case since the SFDR categories are not prescriptive and any funds promoting E/S characteristics have to prepare article 8-compliant disclosures.
Preparing article 8 disclosures in no case guarantees that minimum sectoral exclusions are applied, for example, or that a specific thematic is followed. The design of article 8 funds and their underlying promoted E/S characteristics are very flexible.
How can we ensure that the pursuit of ESG objectives does not compromise the competitiveness of financial products?
In September 2024, the European Fund and Asset Management Association issued a market insights report highlighting that overall, the performance of sustainable equity Ucits is comparable to that of non-sustainable equity Ucits, suggesting an absence of substantial performance trade-offs. In other words, investors do not need to sacrifice a part of their financial returns by choosing a sustainable product.
Efama noted that on average, sustainable equity funds are generally more cost-effective compared to non-sustainable equity Ucits, a trend supported by existing literature. This conclusion is confirmed even when the comparison is limited to active Ucits only.
Investors vary widely in their ESG priorities, as some prioritise environmental impact, while others focus on social issues or governance. Harmonising these interests within the scope of EU regulations can be difficult
How can fund managers effectively demonstrate their commitment to ESG principles and avoid accusations of greenwashing?
Greenwashing is a very complex issue that has prompted several enforcement actions in recent months (Wisdomtree, Invesco, DWS, etc.), as well as several regulatory clarifications, notably with two European Securities and Markets Authority reports on greenwashing in which the regulator attempted to define greenwashing.
There are two levels of greenwashing in practice: First is transparency. This first step is about the need to say what you do and do what you say. Be as clear and precise as possible about what a product does (or does not do) and then duly implement the approach and report on it accordingly. Several cases of greenwashing to date were still brought up for lack of transparency and because this initial first step was not properly tackled.
Second comes credibility. This second step is about offering credible ESG products that appeal to investors while delivering real-world (or real portfolio composition) impacts. The other greenwashing cases that were brought up in the fund industry to date derive from this principle, which is much more subjective and not covered in the SFDR at this stage (since it remains primarily a transparency rule).
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