What does the SFDR legislation mean for your sustainable investments now that the EU wants to relax the rules?
The SFDR legislation is intended to help you, as an investor or entrepreneur, obtain reliable information about sustainable investments and sustainable finance. However, the EU now considers the rules too complex and is considering relaxing them. That sounds attractive: more choice in sustainable products. But there is also a risk that greenwashing will increase again. So how can you make sure you continue to make the right choices?
What is the SFDR legislation?
The SFDR legislation is European legislation requiring banks, asset managers and fund providers to explain how sustainable their products really are. It concerns the way they address environmental matters, social policy and good governance (ESG regulation). The European SFDR Regulation and the broader ESG legislation are intended to prevent institutions from simply labelling a product as "green", "impact" or "climate" without proper justification.
Why is the SFDR legislation so important
for your sustainable investments?
For your sustainable investments, this means that you should receive better information about how "green" a product really is.
Documentation often refers to SFDR Articles 6, 8 and 9 and to SFDR classification. These labels help you compare products, although it remains important to look carefully at the substance.
In practice, this ESG regulation has proved very complex. The EU itself now describes the rules as unnecessarily complicated and restrictive. For you as an investor or borrower, this complex regulation can have the opposite effect: some institutions now offer hardly any sustainable products because the administrative burden and ESG obligations have become too onerous.
The result: less choice, even though you want to invest in genuinely sustainable investments.
What changes if the SFDR legislation is relaxed?
If the EU relaxes the SFDR legislation, it will probably become easier to label a product as sustainable. Institutions will have more scope to develop new funds and forms of sustainable finance. This could be positive for you: more choice, more tailored solutions and more opportunities to link your money or financing to your sustainability objectives.
There is, however, a downside. Less stringent rules also create more scope for vague sustainability claims. Some parties will test the boundaries and make their products appear greener than they really are. That is precisely what greenwashing is: using sustainability as a marketing device.
It is therefore particularly important now to look critically at sustainability labels, sustainability criteria and the evidence underpinning a product.
How can you recognise greenwashing under the (relaxed) SFDR legislation?
There is already a great deal you can do yourself to recognise greenwashing:
- Ask further questions: what exactly is SFDR and how does the product fit within it?
- Check whether the provider refers to SFDR classification and terms such as SFDR Articles 6, 8 and 9.
- Check whether reference is made to the EU Taxonomy (the European list containing clear criteria for sustainable activities).
- Look for specific sustainability criteria: do they concern CO2 reduction, social aspects or governance? How are they measured?
- Be critical of attractive images and vague wording about "green" or "impact" without supporting figures.
Are you not receiving clear answers, or does the information remain vague? That may be a sign that the product is less sustainable than it appears.
What can you already do as an entrepreneur or investor under the SFDR legislation?
Whether you are a private investor or an entrepreneur looking for sustainable finance, you are entitled to ask critical questions. For example:
- What proportion of the fund or loan does the provider say complies with the EU Taxonomy?
- How does the institution deal with its ESG obligations towards you as a client?
- What greenwashing risks does the institution itself identify and how are those risks mitigated?
You can have the applicable sustainability commitments recorded in documentation and contracts. This may include reporting obligations, assessment of objectives or arrangements governing what happens if a product fails to meet the promised sustainability criteria.
Do you want to be sure that your investment or financing is genuinely sustainable?
Are you unsure whether a fund, bank or other provider has given you reliable information? Have you invested in a product that was sold as "sustainable" or "ESG", only to find that the supporting evidence is extremely weak? This may amount to misleading sustainability claims or even a breach of contract.
A lawyer can assess whether the provider has complied with the SFDR legislation and other ESG regulation. We also consider the information you were given and the terms agreed in the contract. In some cases, a firm complaint or negotiation is sufficient. In other cases, liability or compensation may need to be considered.
Please feel free to contact me or one of our other Company Law lawyers. We will review the matter with you, explain the documentation in plain language and help you make a choice that fits both your sustainability and financial objectives.
FREQUENTLY ASKED QUESTIONS ABOUT THE SFDR LEGISLATION
Why is the EU considering relaxing the rules for sustainable financial products?
The EU considers the current SFDR legislation too complex and burdensome to implement. Institutions must collect and report large amounts of data, which creates costs and risks. As a result, some banks and funds are reluctant to offer sustainable products. By relaxing the rules, the EU hopes to create more room for innovation and a broader product offering.
What is the risk of greenwashing as a result of the proposed relaxation of the SFDR?
If the SFDR legislation becomes less stringent, there will again be more room for interpretation. Some institutions may use that room to make products appear more sustainable than they are. This may involve vague sustainability claims, attractive marketing terminology and unclear sustainability labels.
What are the consequences of the current strict SFDR rules for the availability of sustainable products?
The current strict SFDR legislation leads some providers to opt for straightforward products without a sustainability label. This is safer and administratively easier. The result is fewer funds and fewer forms of sustainable finance with a clear sustainability objective. The rules then do not fully achieve what the EU intends: directing more capital towards genuinely sustainable activities.
How can I, as an investor, avoid investing in funds that engage in greenwashing?
You can reduce the risk of greenwashing by being critical of the information you receive. Ask for the evidence supporting sustainability claims, the sustainability criteria used and the link with the EU Taxonomy. Do not rely solely on marketing; also look at reports and independent information.
What information should I require as an investor in order to assess the sustainability of a product?
At a minimum, ask about the SFDR classification, references to SFDR Articles 6, 8 and 9, the link with the EU Taxonomy and the specific sustainability criteria. How is performance measured, how is it reported and what risks are identified? A serious provider should be able to explain this clearly. The more specific the information, the lower the risk of greenwashing.
Will relaxation of the SFDR affect the financing I apply for as a business?
Yes, it may. Banks and other financiers may find it easier to offer new forms of sustainable finance if the SFDR legislation is relaxed. This could create opportunities if your business wants to invest in sustainable projects. At the same time, you should make sure that the sustainability arrangements in your financing documentation are clear. Here too, well-drafted contracts and clear ESG obligations help prevent disputes later on.
What is the difference between a 'sustainable' product and a product with ESG characteristics?
A product marketed as "sustainable" will generally have sustainability as its principal objective. In a product with ESG characteristics, ESG aspects are often more supporting in nature. The SFDR legislation and ESG legislation seek to clarify this distinction through SFDR classification and references to SFDR Articles 6, 8 and 9. In practice, it remains important to look at the substance: what objectives apply, how firmly are they documented and how is performance reported?
How should I interpret sustainability labels on financial products after the rules are relaxed?
Following a relaxation of the rules, sustainability labels may be defined less strictly. This makes it even more important not to rely on them blindly. Always review the underlying criteria, the link with the EU Taxonomy and the explanation in the documentation. A label is a starting point, not an end point.
What legal steps can I take as an investor if a fund engages in greenwashing?
If a fund misleads you through incorrect or exaggerated sustainability claims, this may have legal consequences. This could include liability for loss or a dispute concerning compliance with contractual obligations. The appropriate steps will depend on the documents, the communications and the precise application of the SFDR legislation and other ESG regulation in your particular situation.
What is the EU Taxonomy?
The EU Taxonomy is the European classification system that determines which economic activities are genuinely sustainable. It provides objective criteria so that investors and financiers do not have to rely solely on marketing language, but can see the extent to which a product or investment is actually 'taxonomy-aligned'.
