The Sustainable Finance Disclosure Regulation (EU) 2019/2088 (SFDR) aims to enhance transparency in financial services in order to direct private capital towards sustainable investments, while preventing "green washing". From March 2021, SFDR is gradually being applied to a wide range of financial institutions, including asset managers, institutional investors, insurance companies, pension funds and investment companies.
The transparency required by the SFDR Regulation helps investors make informed decisions and promotes investment in sustainable projects
The SFDR requires these entities to disclose information on (ESG) factors - environmental, social and governance - thus facilitating the availability of comparable data for investors. This transparency helps investors make informed decisions and promotes investment in sustainable projects.
Under the SFDR there are three categories of financial products (Funds) and they are classified as follows:
Article 6 Funds: Funds that are not primarily focused on sustainability, but must disclose how they incorporate sustainability risks.
Article 8 funds: Products that promote environmental or social features, provided that investments are made in companies with good governance practices.
Article 9 funds: Those that have sustainability as their main objective, seeking to create a positive impact on society and/or the environment.
On the other hand, greenwashing raises significant concerns regarding ESG investments, as it can mislead investors and undermine the credibility of sustainability efforts. The SFDR regulation aims to reduce the risk of misleading investors through various mechanisms such as:
- Enhancing transparency by ensuring that investors have clear and accurate information,
- Strengthening overall investment strategies by aligning them with genuine sustainability objectives,
- Establishing verification mechanisms and accountability to validate sustainability claims; and
- Introduce strong regulatory oversight to monitor and enforce compliance.
However, it faces various challenges and criticisms regarding its complexity, lack of standardised definitions and unclear requirements, but also in terms of data quality and availability
Although the SFDR is a strong framework, it faces several challenges and criticisms, including:
Complexity and Application: The regulation is complex and companies may struggle with the detailed reporting requirements. There is also a risk that the complexity may create loopholes that allow for greenwashing and overshadow a company's overall sustainable goal.
Lack of standardised definitions: The SFDR does not clearly define what is considered a sustainable investment. This makes it easier for companies to label their investments as "sustainable" even if they do not meet common ESG standards. The problem is made worse by the complexity of the regulation and overlapping terminology. For example, a fund labelled "Article 9" may claim to have sustainability objectives but not be fully aligned with the EU Taxonomy or Principal Adverse Impacts (PAI) reporting.
Data quality and availability: high quality and reliable data are critical for accurate sustainability reporting. However, deficiencies in data availability or quality can undermine the effectiveness of the SFDR in preventing greenwashing. Data collection can also be very time-consuming and costly, especially for smaller companies or those without third-party data sources.
Unclear requirements: SFDR requirements are often vague, allowing companies to interpret them in ways that serve their own interests. For example, while the regulation requires companies to disclose how they consider sustainability risks in their investment decisions, it does not specify how to measure or evaluate these risks.
E-On Integration specializes in providing customized services to help financial institutions effectively integrate the requirements of the Sustainability Disclosure Regulation (SFDR). Our RIBIA ESG platform facilitates ESG data collection by allowing users to enter and track key ESG indicators. In addition, we offer consulting support to our customers to ensure full compliance with regulatory requirements .
See more on RIBIA ESG here.