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March 15, 2022

Reflecting on SFDR one year on

(Photo by JULIEN WARNAND/POOL/AFP via Getty Images)
(Photo by JULIEN WARNAND/POOL/AFP via Getty Images)

As the Sustainable Finance Disclosure Regulation hits the one-year mark, asset managers reflect on the benefits and challenges of implementing the rule.

On March 10 2021, the European Commission set the Sustainable Finance Disclosure Regulation in motion, imposing mandatory environmental, social and governance (ESG) disclosure obligations for asset managers and other relevant financial market participants.

The SFDR aims to harmonise sustainability disclosure standards among EU member states, and facilitate: greater transparency on the integration of sustainability risks; the consideration of adverse sustainability impacts; the promotion of environmental or social factors; and the sustainable investment objectives of financial products. One year after the new regulation came into effect, the asset management industry is learning how to manage it, and embrace the benefits it can bring. 

Alix Chosson, senior ESG analyst at Candriam, says the asset management firm has welcomed SFDR regulation, acknowledging the need for more “transparency, common standards and common definitions if we want sustainable finance to keep growing and generate positive impacts on our economies”.

And at Amundi, chief responsible investment officer Elodie Laugel says the regulation has been a “positive game changer” for the financial market. She says that it has established the notion of double materiality, whereby companies report both on how ESG factors impact their business value, and also on how the impact their activities have on the environment and society. 

However, Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change, says that while the introduction of SFDR was a “landmark moment for sustainable finance” with an “ambitious and comprehensive attempt to increase market transparency on sustainability issues and address the risk of greenwashing”, there are still several issues to overcome if we are to see its full positive effect.  

Lack of clarity

Pfeifer says: “The ability of investors to implement SFDR has been hampered by a lack of clarity from regulators.” For example, investors still lack finalised detailed guidance on how to interpret the regulations. This has caused confusion within the industry and led to different approaches to classifying products, creating the risk that SFDR contributes to the same greenwashing it was designed to combat.

Mea Lewis, director of ESG advisory at governance, risk and compliance advisory firm ACA Group, says there are also challenges for firms in interpreting these broader rules and regulations based on the nuances of their own individual strategies. She says there are lots of questions from clients and firms across the board that require a level of specificity not yet in the guidance.

For example, if a firm has determined it has an Article 9 fund (one that has sustainability as a primary objective), what percentage of that fund needs to have this primary objective? For the remaining percentage, what should the focus be ? “Do they have to be neutral and not cause harm, or should they be more open to allow hedging to that strategy within that particular fund product?” she says.  

Candriam’s Chosson says that finding common standards definitions and indicators related to sustainability is a complicated exercise – as highlighted by the fact that SFDR obligations have been amended and modified several times. 

The data problem

The lack of availability and quality of data is another prevalent issue for firms as they integrate SFDR. Pfeifer says that to make disclosures under SFDR, investors need access to the relevant data being reported by their investees. However, this will not be readily available until the EU’s Corporate Sustainability Reporting Directive enters into force next year. 

“This has left many asset managers reliant on proxies and estimated data, reducing their ability to understand their exposure to climate-related risks and opportunities, as well as the impact of their investments on the climate,” she says. 

Chosson says that the inconsistent timing of implementation between several pieces of EU regulation (the SFDR and the CSRD) has also created gaps in terms of corporate disclosure and investors’ disclosure obligations.

“Obviously, this is the beginning of the journey and it will improve over time,” she says. “But if we want ESG to be more integrated into investment decisions and to generate real-world outcomes, we need accurate and reliable ESG data that is performance rather than disclosure-oriented. This is why corporate disclosure obligations are the foundations of any impactful sustainable finance regulation.”

ACA’s Lewis acknowledges that there are limitations to data but hopes that this will be addressed over time: “I think what we will see is more proxy information being used now, and as that data flows in, a shift towards actual data.”

Overall, she says, the disclosure framework is intended for firms to demonstrate more of what they are doing in practice through reporting and documentation. As there is more understanding of what firms are doing and the different approaches they are taking, and as more data becomes available, “then we will see convergence of these standards over time”. 

The purpose of SFDR

Amundi’s Laugel also says she has seen frequent conflation between definition and disclosure. “SFDR is designed as a disclosure regulation, intended to give transparency. As the requirements applying to funds are linked to the way ESG/sustainability is integrated in their processes, it has translated into categories,” she says.  

However, SFDR does not classify funds or guarantee a level of impact, but only allows investors to have a full view on how the products take ESG and, more broadly, sustainability into account. “SFDR provides transparency, but the responsibility to assess the impact of a product rests on the shoulders of the investor,” Laugel says. 

Stephanie Maier, global head of sustainable and impact investment at GAM Investments, says: “The regulation is inherently focused on disclosure. However, we have seen parts of the market make the mistake of responding to it as a label, which may have unintended consequences. Broader education is required to improve understanding, not just for those disclosing but importantly for those using the disclosures.”

While the regulation is far from perfect, SFDR has the potential to set the standard for disclosure reporting. Lewis says her firm has seen global interest in it: firms that fall out of the mandatory scope of the regulation have enquired about SFDR, wanting to learn more about it and even compare it to other voluntary frameworks. “What they’re doing is looking at the EU and the jurisdictions here to see if this is really the first mover. Is this setting the bar? How can they look to get ahead?” she adds.

Laugel also notes that SFDR’s reach is global, as now Amundi’s Japanese clients know what an Article 8 or 9 fund is.

Prepare for next level

Looking ahead, only ‘level 1’ of the regulation has come into effect, with the implementation of ‘level 2’ obligations, which require companies to report principal adverse sustainability impacts statements, to come into force in January 2023, after being delayed several times. Lewis hopes that the more granular pieces of regulatory guidance will help allay concerns around greenwashing and different interpretations of the regulation. 

She adds that now is the time for firms to take further steps in documentation, assessment and planning in order to prepare for that further reporting. Also, investors are pushing faster than the regulation is rolling out – and being prepared can only make it easier for firms when the new regulation is enforced; asset managers will want to have better assimilated SFDR by its second anniversary. 


A service from the Financial Times