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January 9, 2024

SFDR has ‘incentivised decarbonisation’ of sustainable funds, says European non-profit

The research also found the drop in emissions was higher for countries “with higher sensitivity towards sustainability” such as Denmark (Photo: Mads Claus Rasmussen /Ritzau Scanpix/AFP via Getty Images)
The research also found the drop in emissions was higher for countries “with higher sensitivity towards sustainability” such as Denmark (Photo: Mads Claus Rasmussen /Ritzau Scanpix/AFP via Getty Images)

The European Corporate Governance Institute has found Scope 1 emissions from companies held in Article 9 and 8 funds fell 13.7 per cent more than other fund types following the introduction of the SFDR

The EU’s Sustainable Finance Disclosure Regulation has led to a decrease in the average portfolio emissions of Article 8 and 9 funds, says a report published in December by the European Corporate Governance Institute. 

“Overall, our results support the notion that mandatory disclosure can incentivise decarbonisation by asset managers,” the ECGI says in the report, which was written by academics at Spain’s University of Navarra. 

The SFDR, which requires EU financial market participants to disclose the sustainability credentials of their funds, came into effect in February 2023. Under the rules, Article 9 cover wholly sustainable assets while Article 8 promote ESG characteristics. 

The European Commission says that the disclosure requirements “[help] those investors who seek to put their money into companies and projects supporting sustainability objectives to make informed choices”.

The ECGI report says while some emissions decreases may be explained by investors altering their portfolios due to diverging returns on investments, European investors are also deciding to align their portfolios with carbon emissions reduction following the introduction of the SFDR.

The study observed a sample of active Article 9 and 8 funds and found that, compared to a control group, Scope 1 and Scope 2 carbon emissions of their portfolios fell by an additional 13.7 per cent and 5.8 per cent, respectively, following the introduction of the SFDR.

The majority of the funds measured were EU domiciled but certain UK and US funds which market their products to the EU, and are therefore subject to the SFDR, were also included. The control group which was used as a point of comparison included SFDR’s Article 6 funds, which do not focus on sustainability; US domiciled funds that are subject to the UN’s Principles for Responsible Investment but not the SFDR; and other sustainable funds that are not subject to the SFDR. In total, 4,021 active equity mutual funds were observed for the study.

Researchers say the funds with the greatest drop in portfolio-linked carbon emissions were those with the highest emissions prior to the introduction of the SFDR. The drop in emissions was also higher for countries “with higher sensitivity towards sustainability”. The higher sensitivity countries were selected based on the 2022 Environmental Performance Index – developed by Columbia and Yale universities – which looks at governments’ policy actions and features Denmark, Finland and Malta as the highest performing EU member states.

The report’s authors suggest, however, that more research is needed on the potential negative impacts of the SFDR. These include “carbon leakage” – where companies outsource high-polluting sectors abroad in order to avoid disclosing emissions – and greenwashing, where funds’ names imply that they are more sustainable than they are.

The report is available to read here.

A service from the Financial Times