Confusion has reigned since the EU’s “Sustainable Finance Disclosure Regulation (SFDR)” legislation went into force in March 2021. SFDR had highly ambitious objectives—not only preventing fund “greenwashing” but also shifting capital in support of the EU’s “Green Deal” to become carbon neutral by 2050. Three years later, it is worth asking whether SFDR has achieved those objectives. Or whether it has simply become a complex and ever-changing labeling exercise.

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As a starting point, it is still unclear exactly how to categorize a sustainable fund under SFDR. There has been much discussion about what exactly constitutes an Article 8 fund (so-called “light green” since they “promote environmental or social characteristics”) and an Article 9 fund (“dark green” since it goes further and “has sustainable investment as its objective”). The language here is highly ambiguous, particularly since the term “sustainable investment” is used to cover both types of funds, as discussed below. This has created a bonanza for lawyers hired by fund managers to help them substantiate how they are categorizing their funds.

The lack of clarity has created significant confusion in the market. Fund managers have “downgraded” Article 9 funds to Article 8. They have “upgraded” Article 6 funds, which are not claiming any sustainability benefits but still have to report on sustainability risks, to Article 8 and even Article 9. According to Morningstar, in the past quarter 220 funds changed their classification, 190 of these being Article 6 to Article 8.

Very sensibly, on September 14, 2023 Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union announced “an in-depth three month consultation for stakeholders” to determine “if our rules meet their needs and expectations, and if it is fit for purpose.”

On May 3, 2024 the EU published a Summary Report of this Consultation. It found “Widespread support for the broad objectives of the SFDR but divided opinions regarding the extent to which the regulation has achieved these objectives during its first years of implementation.” Here are some of the key findings:

• “89% of respondents consider that the objective to strengthen transparency through sustainability-related disclosures in the financial services sector is still relevant today.”
• “94% of respondents agree that opting for a disclosure framework at the EU level is more effective than national measures at Member State level.”
• “77% of respondents also highlighted key limitations of the framework such as lack of legal clarity regarding key concepts, limited relevance of certain disclosure requirements and issues linked to data availability.”
• 84% felt “ that the disclosures required by the SFDR are not sufficiently useful to investors.”
• 58% don’t feel the costs “to be proportionate to the benefits generated.”
• 82% felt “that some of its requirements and concepts, such as ‘sustainable investment ’are not sufficiently clear.”

It also found that 83% of respondents felt that “the SFDR is currently not being used solely as a disclosure framework as intended, but is also being used as a labelling and marketing tool (in particular Article 8 and 9).” That said, there was no consensus on whether to split the categories in a different way than Articles 8 and 9 or to convert them into formal product categories by clarifying and adding criteria to the underlying concepts.

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