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Earlier this week, I wrote about ESMAs’ recent consultation on sustainable investment naming criteria. In a similar vein, the EU’s Sustainable Finance Disclosure Regulation (SFDR) has faced issues for some time now. The law is intended to require financial institutions to disclosure how they integrate sustainability risks and principal adverse impacts (PAIs) in their investment strategies at the entity and product level. Funds purporting to align with higher sustainability standards (Article 8 and 9 funds) are subject to more in-depth disclosure requirements. While this may sound simple in concept, the law faced serious challenges. For one, the criteria for Article 9 funds were confusing, leading many to abandon the label and downgrade to Article 8. The European Commission and European Banking Authorities have been trying to figure out how to fix the SFDR for some time now, but recent responses to a consultation on the issue are not providing a clear path forward. Proskauer writes in their memo discussing the responses:

“A large majority of respondents believe that EU sustainability product categories are necessary for an efficient distribution system based on investors’ sustainability preferences (69%), to combat greenwashing (64%) and to facilitate professional investors’ (72%) and retail investors’ (80%) understanding of products’ sustainability-related strategies and objectives.  Over 70% of respondents believe that disclosures alone are not enough to achieve these objectives.  However, views were divided in the middle as to whether categories should be based on new criteria, unrelated to existing SFDR concepts or if Article 8/9 should be converted into product categories with bolt on clarifications and additional criteria to the existing concepts.”

While most respondents seem to agree that creating product categories is important to sustainable finance, there is disagreement on what criteria to use and how those categories should be structured. Additionally, the 70% of respondents who believe that disclosures are not enough to properly inform investors have a salient point. This is exactly why the Dutch government recently warned funds not to advertise based on their SFDR classification, because – while an Article 9 fund may be disclosing at a higher benchmark – that doesn’t mean that they’re performing at a higher benchmark. All of this creates confusion for investors looking to invest sustainably. The future of the SFDR remains uncertain, but most agree that change is necessary.

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The Editor

Zachary Barlow is a licensed attorney. He earned his JD from the University of Mississippi and has a bachelor’s in Public Policy Leadership. He practiced law at a mid-size firm and handled a wide variety of cases. During this time he assisted in overseeing compliance of a public entity and litigated contract disputes, gaining experience both in and outside of the courtroom. Zachary currently assists the editorial team by providing research and creating content on a spectrum of ESG… View Profile