EU’s SFDR shortcoming recognition requires adequate action

The move comes as a significant shift, considering the initial optimism surround SFDR’s implementation aimed at enhancing transparency and promoting sustainable investments.

It follows calls from Amundi, a leading European asset manager, for an overhaul of MiFID II environmental, social and governance rules, changed by the SFDR in November 2022. The company is urging the EU to overhaul rules requiring distributors to march funds to investors’ sustainability preferences, highlighting a critical shortcoming of SFDR.

Since 2022, the MiFID ules have required intermediaries to ask investors if they would like to consider sustainability when making investments. Investors are then asked to choose between funds with a certain proportion of alignment with the EU sustainable finance taxonomy, funds that possess a minimum level of sustainable investment, or make investments while considering principal adverse impact indicators. Amundi bosses have expressed concerns with the complexity of these rules, calling for more simplicity from the EU.

Amundi has reclassified nearly all of its ‘Article 9’ funds to the less stringent ‘Article 8’ level, citing uncertainties in the regulatory framework. The move underscores the challenges asset managers face in complying with SFDR’s requirement, particularly in defining what constitutes a “sustainable” investment.

Investment funds expert Mark Shaw of Pinsent Masons said: “Fundamentally, my issue with the rules is that it cannot be right that the burden is put on the end investor to actively select non-ESG funds. Ultimately, earnings matter, and we have seen a bit of a trend of asset flows away from Articles 8 and 9 funds and into Article 6, so the risk is that the smart money is moving out of these funds and the retail money, at least where they fail to make an election, is forced into them. This would be a poor consumer outcome.”

Other shortcomings of the design of SFDR have been highlighted since the introduction of the regime. This includes the claims that the rules can encourage greenwashing or even ‘green-bleaching’ – when funds choose not to claim that their products are sustainable in order to avoid extra regulation and potential legal risks.

However, the EU’s recognition of the SFDR’s shortcomings and its efforts to rectify them mark a pivotal moment in the evolution of sustainable finance regulation. The landscape will likely continue to shift with both investors and asset managers urged to stay informed and adapt to any further changes, Shaw said.