SFDR: A Real Solution for Transparency or an Invitation to Greenwashing?

SFDR and the risk of being reclassified as Article 8: problems and possible solutions to minimize reputational risk.

Countless articles have been written denouncing the confusion and vagueness of the SFDR regulation. Everyone is playing it by ear.
The only thing that seems sure for the SFDR is the mess being caused by the reclassification of funds as Article 8. In fact, European asset managers are going to have to reclassify thousands of ESG funds in the coming months.
The latest example to date is that of Amundi (see Bloomberg 1), which is downgrading nearly all its funds initially classified under Article 9 to Article 8.  
Only a small fraction of funds registered under Article 9 (the strictest category of the European Union) actually meet the level of sustainable investing required by European regulations.

Brief Review of the Establishment of the SFDR

SFDR Level 1: Since March 10, 2021, funds approved for sale in the European Union must be classified by asset managers as falling under Article 6, Article 8, or Article 9 of the SFDR regulation, based on product sustainability objectives.
SFDR Level 2: The entry into force of SFDR Level 2 Regulatory Technical Standards (RTS) is set for January 1, 2023.

SFDR regulation reputational risk

What are the new SFDR requirements for 2023?

At Level 2 of the SFDR regulation, funds classified as Article 8 or Article 9 have to meet more detailed requirements. They must:

  • Report on the sustainable characteristics/objectives of the product: What are they? How are they achieved? What strategy should be used?
  • Report on the Taxonomy: Will the product make investments aligned with the Taxonomy? If so, what will be the product’s percentage of alignment with the Taxonomy?
  • Report on companies’ good governance practices.
  • Report on how sustainable investments are aligned with the UN Global Compact in terms of responsible business practices and sustainable development or with the OECD Guidelines for Multinational Enterprises.
  • Align with OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
  • Report on how the Principle Adverse Impact indicators (PAIs) were taken into account.

However, today, many studies point to shortcomings in funds categorized as Article 9 by Asset Managers.
Morningstar (2) estimates that fewer than 5% of Article 9 funds target sustainable investment exposure between 90% and 100%. Only 26 funds are believed to target 100% allocation to sustainable investments. Meanwhile, Novethic has shown that most funds provide unclear explanations of their objectives and the approach taken to achieve them, relying on few impact indicators to measure their actual contributions. (3)

What are the reasons behind reclassifying funds as Article 8?

The concept of sustainable investing is still subject to a variety of interpretations, as regulators have not given any specific guidance up to now.
The definition of “sustainable” investment is quite broad and how it is interpreted varies from one financial player to another. In the absence of clarity, investors have developed their own internal frameworks. These downgradings result from new regulatory guidelines and in no way reflect changes in investors’ strategies.
According to the European ESG Template (EET) data, the trend is not about to reverse; on the contrary, we should expect the number of Article 9 products to drop in the next six months compared to their current level.


What solutions are there to protect oneself against the reputational risk related to the SFDR reclassification?

The SFDR regulation, in a phased approach, aims to increase transparency. Within this framework, only the use of sound data, in addition to the data required by the SFDR regulation, will allow asset managers and other investors to minimize this reputational risk.
In the short term, this raises an important issue for asset managers, who are going to have to either downgrade funds from Article 9 to Article 8 or enhance their Article 9 strategies by tightening up their investment criteria.
The question that quickly gets asked in the midst of this SFDR regulation—a work in progress—is: How can we tighten investment criteria given the changing nature of the regulation and regulatory guidelines?
“Measuring better” is the key. Measuring better means measuring the right data in a common language.

  • We have to strengthen the transparency and traceability of data collection methodologies: the European Taxonomy, controversies, governance practices, and principal adverse impacts (PAIs) on sustainability factors.
  • Use a common language to set sustainability objectives: the European Taxonomy for environmental objectives and the Sustainable Development Goals (SDGs) for environmental and social objectives. (4)
  • We need to develop a complementary, rigorous interpretation that will allow us to have more context concerning companies’ sustainability performance and to choose the most material optional PAIs.

Reclassification of Article 9 and Greenwashing


Today, we can affirm that reclassifying funds from Article 9 to Article 8 is a real reputational risk for asset managers. For clients of these funds who are unaware of what’s going on behind the scenes of the SFDR, the reclassification of Article 9 funds may very easily look like greenwashing in its simplest form, i.e. “a deceptive marketing practice that consists of playing the environmental ‘card’ to give oneself an environmentally- friendly image, far from reality.”
So, is it intentional greenwashing? Or simply interpreting the SFDR to one’s advantage? The issue is more about minimizing this reputational risk and increasing the level of confidence in Article 9 funds, which are vital for the impact economy.

SFDR Trial

(1) Bloomerg : Amundi, Deutsche Bank’s DWS Downgrade ESG Funds in Big Reset 
(2) Morningstar : SFDR Article 8 and Article 9 Funds: Q3 2022 in Review

(4) GS SUSTAIN SFDR, one year on – Trends and Anatomy of Article 8 & 9 funds

written by:  Marion Bitoune, ESG regulatory lead and SFDR expert at impak Analytics

In collaboration with Axel Bonaldo

Copyright impak Ratings 2022


Marion Bitoune et Axel Bonaldo