The European Commission introduced the Sustainable Finance Disclosures Regulation (SFDR) in 2021, in a bid to increase transparency and mobilise capital in line with Europe’s environmental and social objectives.
The best known part of the law has been the establishment of two types of ‘sustainable’ fund: Article 8, for those that consider sustainability, and Article 9 for those that proactively pursue sustainability objectives.
But a study released last week, by researchers at Stanford University, Harvard Business School, the University of Amsterdam and London Business School, has concluded SFDR has not reduced greenwashing or given a boost to investment funds with more credible portfolios.
“We looked at two possible effects that the introduction of SFDR could have had,” explained Paul Smeets, a professor of philanthropy and sustainable finance from the University of Amsterdam, and co-author of the report.
“First, whether it changed investment flows. In other words, whether funds that called themselves Article 8 or Article 9 attracted more capital than they did before those labels were available to them.”
Secondly, the researchers explored whether the introduction of SFDR incentivised funds to become more sustainable, in order to be eligible for under Article 8 or 9.
“We found no meaningful evidence that the regime achieved either objective,” Smeets told IPE.
Traffic light system more effective
The paper also analysed whether end investors responded to changes in the ambitions of funds under SFDR.
For example, in 2021, EU officials were perceived to be tightening their expectations for what counted as an Article 9 fund under the rules. This resulted in a slew of Article 9 funds being voluntarily ‘downgraded’ to Article 8 by managers, to avoid potential supervisory action.
“We found that there were no notable changes to the inflows or outflows of those funds that chose to downgrade, compared with funds that retained their Article 9 status,” Smeets said.
He added that one of the reasons for SFDR’s lack of influence is that the disclosures it requires are too complex for most retail investors, resulting in a lack of engagement with the information.
“It’s not that investors don’t care about sustainability, it’s that SFDR is too complicated for retail buyers.”
The research trialled a traffic-light system on potential investors – in which red signified the least sustainable funds, and green the most sustainable – and found it was much more effective at influencing investment decisions.
The Commission is currently collecting feedback on a proposal to turn SFDR into a categorisation system. It has extended its consultation until 17 March.
Last week, the European Securities and Markets Authority published a document “addressing greenwashing risks in support of sustainable investments”, which includes examples of good and bad practice.
