Revised European rules for sustainable funds leave “room for greenwashing” due to weak basic criteria, limited exclusions and an absence of engagement-related requirements in its new category for ‘transition’ investment vehicles.
Eurosif, which represents domestic European sustainable investment fora, said the European Commission’s proposed changes to the Sustainable Finance Disclosure Regulation (SFDR), laid the foundation for a more “fit-for-purpose framework” than the framework introduced in 2021.
But it said the removal of entity-level disclosures on principal adverse impacts and reduction in product-level disclosures could “further reduce comparability for investors”. Further, the lack of mandatory engagement-related requirements for the SFDR’s proposed new transition category “fails to incentivise meaningful decarbonisation efforts among investee companies”.
The commission’s review of SFDR is aimed at providing greater clarity for investors and simplifying requirements for suppliers, partly by replacing disclosure requirements with product categories for ‘ESG basics’, ‘sustainable’, and ‘transition’ funds. Funds in the sustainable and transition categories must invest a minimum 70% in assets that contribute positively to their stated objectives.
The commission’s proposals differ from a draft leaked two weeks ago which allowed alternative investment funds marketed only to professional investors to opt out of SFDR.
The change of approach could force providers to curtail meaningful sustainability disclosures or “fundamentally restructure products to fit rigid new categories”, said Phil Bartram, Partner at Travers Smith. “Such a move is likely to drive a ‘herding’ effect into the least demanding category, undermining differentiation and innovation.”
Although the proposals are subject to revision and amendment by the EU co-legislators – the European Parliament and Council of the EU – providers of ‘green funds’ are expected to review existing Article 8 and 9 funds rapidly and map them to the new SFDR categories to minimise disruption and maintain client confidence.
“Asset managers face non-negligible transition costs as they reclassify funds, analyse portfolios and adapt internal processes. And while the new categories set clearer expectations, there is still a large element of subjectivity,” said Tom Willman, Regulatory Lead at data provider Clarity AI. “It remains to be seen how far they will go in protecting consumers and reducing greenwashing.”
