SFDR: Europe’s first step to combatting greenwashing in financial services

March 31, 2021

This month marked an important milestone for financial markets across the EU, as the long-anticipated Sustainable Finance Disclosure Regulation (SFDR) came into effect. Asset managers and other entities offering financial products in the EU will have to disclose the reality of their sustainability claims, regardless of whether they purport to be offering sustainability-related products or not. The main objective of the regulation is to ensure that financial market participants can finance growth in a sustainable manner. Steven Maijoor, Chair of the ESAs Joint Committee, also said about SFDR’s purpose, “It will provide a strong basis to improve ESG reporting and combat greenwashing.”

It is crucial that we do view the existing version of SFDR as, in Maijoor’s words, a “basis”, or better – a first step along the long road to battling greenwashing. In its current form the SFDR is not a panacea. When looking at the details of the SFDR, it is hard not to feel a tinge of disappointment – the post-consultation consolidation from the initial draft saw a total of 50 sustainability indicators (named principal adverse impacts (PAI) by SFDR) reduced to 32 and of these only 14 are mandatory. Similarly, of the “additional” impacts, respondents can now report on half the number of indicators and still meet minimum requirements.

Even the mandatory indicators seem somewhat of a blunt tool. The diversity issue falls short of expectations covering only gender (with no sign of ethnicity, sexuality or disability). Furthermore, while there are expected mandatory environmental indicators such as GHG emissions, exposure to deforestation is voluntary. The most surprising optional criteria lie in the social impacts. A company can meet the mandatory minimum requirements, despite excluding human rights and child labour issues – which bizarrely fall within the voluntary disclosure.

The SFDR disclosure can be seen as the much-needed nudge to improve data collection practices in financial institutions. We cannot, however, rely on it to eliminate greenwashing – not until we see issues such as human trafficking, deforestation, discrimination and CEO pay ratios as being embedded in the minimum requirements.

Author: Rosanna Greenwood