Industry Updates

EU’s ESG investment rules fuelling greenwashing, French regulator says

SFDR has created a gap between investor expectations and reality of practices

Theo Andrew

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The French financial regulator has called for a tightening of Europe’s Sustainable Finance Disclosure Regulation (SFDR) arguing the current requirements have “fuelled greenwashing”.

A report by the Autorité des Marchés Financiers (AMF), published on 10 February, said there should be a “targeted review” of SFDR due to the lack of minimum sustainable investment requirements, or a definition of sustainable investment.

It said the regulation is currently being “misinterpreted” by investors as a “guarantee” they are participating in the financing of a more sustainable economy.

“The notion of ‘sustainable investment’ set out in Article 2 of SFDR is worded in vague terms, and its implementation by financial actors has resulted in very different understandings of what sustainability is,” the AMF said.

“Therefore, it appears that SFDR has created a gap between the reasonable expectations expressed by investors and the reality of the practices and fuelled the greenwashing.”

Under the regulation, ‘dark green’ Article 9 ETFs have seen a host of reclassifications in recent months due to their stringent 100% sustainable investment requirements. Meanwhile, minimum requirements for Article 8 ETFs have not been defined, leading to a broad array of strategies being labelled.

As a result, the AMF said the current classifications do not adequately assess the nature of the asset manager’s commitment to sustainability.

The regulator made several proposals to tighten SFDR requirements including creating minimum environmental criteria for the classification of products and clarifying the “vague definition” of sustainable investments.

Furthermore, it suggested Article 9 funds should consist of investments that align with the EU’s Taxonomy, excluding fossil fuel activities that to not align.

The regulator also said asset managers should take a binding ESG approach in their investment decision-making process as well as a requirement to adopt engagement policies for Article 8 and 9-labelled products.

It comes as roughly $57bn of assets across more than 70 ETFs were reclassified from Article 9 to Article 8 in Q4 2022 alone, according to Bloomberg Intelligence.

Last November, regulators issued a call for evidence to better understand the level of greenwashing across sustainable investments.

The European Securities and Markets Authority (ESMA) said it would implement rules on how asset managers name their ESG products in a bid to “address any misuse” of SFDR.

Under the proposals, funds labelled ESG should have a sustainable investment threshold of 80% while funds labelled sustainable should have at least 50% invested sustainably.

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