The EU has been an ESG trailblazer. However, being an early adopter of sustainability policy can come with challenges. One of those challenges has been sustainable finance, and particularly the SFDR. The SFDR is a disclosure regime that classifies companies into Article 9, 8, and 6 funds. However, since its inception, its methodology and impact have been questionable. A new study finds that the SFDR has been largely ineffective in promoting sustainable investment, and that many of its purported benefits are better accomplished through other regulations. The authors state:
“We find that the SFDR had little effect on fund flows or portfolio sustainability. The disclosures were ineffective in part because they offered little new or clear information beyond what investors could already infer from fund names and mandates. In an experimental setting, we show that the current disclosures have minimal impact on investor decisions, but making the information more intuitive could improve the regulation’s effectiveness.”
EU regulators have been well aware of the SFDR’s shortcomings. An overhaul of the system, which we wrote about last November, is currently pending. This study marks another piece of important evidence supporting an SFDR rework. Sometimes, first movers suffer from being the first to tackle an issue. The EU’s sustainable finance regulations display global leadership, but they also come at the cost of figuring it out as they go. We’ll see if the new SFDR gets it right where the previous legislation fell short.
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