The Sustainable Finance Disclosure Regulation (SFDR), enacted in 2019, is currently under review due to widespread recognition of its shortcomings. As stakeholders call for improved fund classifications and disclosures, Reclaim Finance has outlined three critical changes needed to enhance the SFDR’s effectiveness and mitigate issues related to greenwashing.
The Need for an SFDR Review
Since its adoption, the SFDR aimed to create order within the European Union’s sustainable funds market. However, the vague criteria in Articles 8 and 9 have led to significant confusion among asset managers and investors alike. Many asset managers have exploited this ambiguity to self-label their funds, resulting in inconsistent and often misleading classifications.
This lack of clarity is particularly detrimental to retail investors, who may mistakenly believe that funds categorized under Articles 8 and 9 possess genuine green credentials. Financial advisors also face challenges in interpreting these categories, which compounds the confusion for retail investors.
Three Essential Changes to the SFDR
To effectively address these issues, Reclaim Finance has identified three key changes that must be implemented in any revised version of the SFDR:
Exclusion of Fossil Fuel Developers: Funds that claim to be environmental or social should be prohibited from including fossil fuel developers in their portfolios. This change aims to ensure that funds making sustainability claims are genuinely aligned with environmental objectives.
Setting Minimum Requirements: The regulation should establish specific minimum criteria for various ESG claims, such as “green/climate,” “transition,” and “impact.” These criteria will provide clearer standards for what constitutes a legitimate environmental or social claim, helping to reduce the potential for greenwashing.
Aligning Transparency and Advisory Obligations: The SFDR should enhance transparency and advisory requirements by adjusting principal adverse impacts (PAIs) and amending the Directive on Markets in Financial Instruments (MiFID). These changes would ensure that investors receive clear, relevant information about the sustainability characteristics of funds.
Conclusion
The review of the SFDR presents a vital opportunity to rectify its inadequacies and establish a more robust framework for sustainable finance disclosures. By implementing these three essential changes, the regulation can better serve both investors and the broader goals of sustainability, ensuring that claims made by funds are transparent, reliable, and meaningful.
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