What’s SFDR and are fund investments equally sustainable?

SFDR (Sustainable Finance Disclosure Regulation) is meant to help investors make sense of the impact of their investments on the planet. By categorising funds into Paris Agreement Article 6, Article 8 and Article 9, it makes their commitment to sustainability goals more transparent.

Floods in Germany. Wildfires in Spain and California. Hurricanes in the Gulf of Mexico. Record-hot summers in Italy.

Far too often it feels like we’re experiencing the effects of climate change way too closely. As more individuals and communities feel these effects, the sense of urgency to act has become greater.

Large companies, given their size and impact on the environment, are under immense pressure to act in sustainable ways. Consumers, communities, governments, businesses, investors and other stakeholders are demanding this change.

This is why EU officials have also turned to help investors to act with better and more transparent information.

Enter the SFDR.

What is SFDR?

In March 2021, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into force.

The SFDR aims to assist investors in better understanding the types of investments a fund manager makes and the impact they have on the planet. This specifically relates to environmental, social, and governance (ESG) issues.

The regulation puts up certain disclosure requirements. Companies need to provide information about

• the integration of sustainability risks;
• consideration of adverse sustainability impacts;
• promoting environmental or social factors;
• sustainable investment objectives.

The idea of this is to make due diligence easier for retail and institutional investors alike.

The objectives of SFDR

The SFDR has three core objectives:

• Improve disclosures so that institutional and retail investors can understand, compare, and monitor the sustainability characteristics of financial products and firms.
• Ensure that European firms do not face unfair competition from firms outside the EU by ensuring a level playing field within the EU.
• Defend against greenwashing.

Essentially, the point of the SFDR is to help people make better investment decisions. This includes helping them take sustainability-related information into account.

Where did the SFDR come from?

Since 2017, the European Union (EU) has been strengthening its sustainable finance regulations. It acknowledges the financial sector’s important role in achieving the EU’s sustainable development goals.

The intent is to encourage the financial sector to support sustainable activities and turn away from harmful ones.

The SFDR, along with a range of other EU sustainable finance initiatives, aims to support the European Green Deal. The Green Deal envisions a European economy that is climate neutral as well as beneficial to biodiversity by 2050. Through a focus on additional disclosures, the SFDR hopes to achieve this.

Disclosures simply mean making certain information public. The idea of disclosures is that allowing end-investors to understand the impact of their investments on society and the environment will encourage them to direct capital toward less harmful and even positive activities.

Does the SFDR regulate funds out of the EU?

SFDR fits within a broader set of EU initiatives and policies structured around the EU Green Deal and the EU Sustainable Finance Action Plan. These have been rolled out since about 2015.

SFDR doesn’t explicitly regulate non-EEA market players. Still, it’s likely that asset owners doing business in the EU will have to comply with the regulation. This means that the SFDR could have a positive, regulative effect outside of the EU.

Articles 6, 8 and 9: figuring out fund objectives

In the SFDR, the European Commission has come up with three classifications: Articles 6, 8 and 9.

• Article 9 is the highest-ranking and means the fund sets sustainable investing as its objective (this is good).
• Article 8 funds promote environmental and social characteristics, but sustainability is not their core goal (okay but could be better).
• Article 6 funds don’t meet the sustainability criteria to be classified higher (not so good or not relevant).

Remember that when you invest in a fund, the fund in turn usually invests in individual companies. Therefore, for a fund to be highly rated under this regulation, it must invest in highly-rated companies.

The more money flows into these sustainable funds, the more money flows into sustainable companies.

How can you benefit from the SFDR?

Can you guess which funds are our favourite at Grünfin?

You’re right – Article 9 is what we aspire to. However, only 3.7% of all fund assets classify under this category. Even if we combine Article 8 and Article 9 funds, they barely exceed one-third of all fund assets. This means finding the right funds is hard.

This is why people still need help in navigating and investing in the most highly ranked sustainable funds. We aim to make it easy, even for beginner investors.

Our climate-themed portfolio consists of Article 9 funds exclusively.

Another piece of good news – we expect the availability of funds to significantly increase soon. MorningStar estimates that Article 8 and 9 funds could reach half of the total fund assets by mid-2022.1

We have also covered why is sustainable investment important?

Start your sustainable investment with Grünfin. We help you invest your money where your values are.