The Dutch Authority for Financial Markets recently published a guidance document outlining Guidelines for Financial Institutes and Pension Providers Making Sustainability Claims. The document warns companies against using SFDR designations in fund marketing materials.The SFDR is a financial disclosure regime in the EU. The purpose of the law is to organize funds into different categories based on those funds’ stated sustainability impacts and goals. For example, Article 8 funds promote environmental or social characteristics and Article 9 funds actively pursue environmental or social objectives.
The problem with funds using these designations in marketing materials is that SFDR designations do not mean that a fund complies with any particular standard – it simply dictates that fund’s disclosure requirements. So you could have an Article 8 fund that fails to meaningfully promote any environmental or social characteristics but discloses the appropriate information required by the SFDR. Such a fund would technically still be an Article 8 fund, although not a particularly good one.
The guidance states that:
“The SFDR is a transparency regulation. Market participants must apply SFDR classifications to determine which transparency requirements they have to comply with. The classifications concern a distinction between products with sustainability objectives and sustainability characteristics. The level of ambition of those objectives or features can vary widely. Therefore, the classifications by themselves do not provide a conclusive indication of a certain sustainability level of the product.”
Additionally, funds self-select their designation so there is no neutral third party assessing them. Investors could be implied if funds were to market themselves based on their chosen designation.
The process of implementing the SFDR has been fraught with confusion, ambiguities and conflict. Some are advocating for abandoning the law and moving to a different system for sustainable finance classifications. Regulators in the EU are attempting to crack down on greenwashing in the financial services sector and new directives and regulations are likely in the future.
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