The Sustainable Finance Disclosure Regulation (SFDR)

What is the purpose of the SFDR?

The purpose of the SFDR is to enhance transparency within the financial sector regarding ESG considerations. By establishing a harmonised set of rules, it mandates clear disclosure for firms manufacturing and marketing investment funds. The SFDR aims to prevent greenwashing by ensuring that claims made about a fund's ESG intentions are accurate and not misleading. It goes beyond existing investor protection regulations by setting clear standards for ESG disclosure and ultimately promotes the flow of capital towards sustainable investments, supporting the EU's broader climate and sustainability goals.

What are the various fund categories under SFDR and what do they mean?

Under the SFDR, funds are classified into three categories based on their level of commitment to ESG factors:

Article 6 funds consider ESG risks in their investment processes but do not claim any explicit environmental or social characteristics. While they acknowledge sustainability risks, they do not prioritise ESG factors in their investment decisions.

Article 8 funds promote certain environmental or social characteristics, but their core strategy is not centred on ESG investing. They must disclose how their ESG claims will be met and how any reference benchmark aligns with those characteristics.

Article 9 funds have a sustainable investment objective. These funds aim to contribute significantly to a sustainable investment objective and must provide clear information on achieving these goals. They actively incorporate ESG issues into their investment strategy and align with sustainability objectives, such as the goals of the Paris Agreement.

What has the impact on asset managers been so far? 

The SFDR has had a significant impact on asset managers. It has required them to rethink their investment purpose for certain funds and to ensure that their claims regarding ESG factors are neither vague nor misleading. Due to changing rules, many asset managers have had to reclassify their funds under the SFDR’s fund categories, leading to a significant number of funds originally classified as Article 9, or those with a core sustainable investment objective, being downgraded to Article 8, those promoting certain ESG characteristics. According to data from Morningstar, this resulted in asset managers shifting approximately 40% of Article 9 funds to Article 8 in the final three months of 2022, equating to €170bn of assets. The SFDR has increased awareness among asset managers and institutional investors about the potential for mis-selling and greenwashing, demonstrating that the regulation is driving change in the industry.