Evidence of Positive Changes in the Industry

Looking at recent developments in the industry, one could say it has. The recent reclassification of several funds from Article 9 to Article 8 shows that the legislation is starting to separate the wheat from the chaff. The fact that funds are now being held accountable, and downgraded to Article 8 if they cannot successfully provide evidence that they are Article 9 shows transparency is increasing and greenwashing is becoming harder and harder.

Challenges and Room for Further Development

However, there is still room for improvement, the lack of criteria for the remaining environmental objectives within the EU Taxonomy means that the breadth of investors that can engage with the SFDR is limited. Certain investors just can’t become sustainable investors if they are focused on certain parts of the industrial value chain. Furthermore, the regulation is still being developed, and there are key requirements which are yet to be clarified (e.g., the exclusion of entire sectors such as oil and gas) which may impact an investor’s ability to be considered Article 9. These definitions can be provided by the EU or national regulators, although to-date, only the French regulator has communicated the intention of clarifying these aspects.

Potential Risks in the Current Framework

There is also a risk that a softer approach to setting EU Taxonomy criteria (e.g., inclusion of Gas and Nuclear), may diminish the robustness of the entire sustainable investment regulatory framework. It is also worth pointing out that the structure of several Do-No-Significant-Harm criteria and some Substantial Contribution criteria are highly dependent on EU legislation – which hinders the ability to assess the operations of sustainable investments outside of the EU.

Conclusion: The Road Ahead for SFDR

Despite these growing pains, the SFDR legislation has enhanced transparency, and helped companies with products and services that deliver substantial contributions to sustainability to gain favourable access to capital by more clearly communicating their benefits and differentiation vis-à-vis less sustainable incumbents. Whilst on the whole the legislation has been a success, continued improvement is required and it is clear that additional clarification from both EU bodies and national regulators is needed to guarantee efficiency of the SFDR.