Han Dieperink: The SFDR is dead, long live the SFDR!
This column was originally written in Dutch. This is an English translation.
The European Commission is working on a successor to the SFDR. In doing so, Brussels implicitly acknowledges that the current sustainability rules for investors are not working.
By Han Dieperink, written in a personal capacity
When the European Commission introduced the Sustainable Finance Disclosure Regulation in March 2021, the underlying idea was noble. Investors needed to be better informed about the sustainability of their investments. Greenwashing had to be curbed. Europe would lead the world towards a greener financial future. Four years and several billion euros later, the regulatory experiment lies in ruins and Brussels is already working on a successor.
The fundamental problem with the SFDR was that no one knew exactly what the rules meant. Article 6, 8 or 9? The classifications were presented as a kind of quality mark, but were never intended as such. It was a transparency framework, not a quality label. Nevertheless, asset managers used the articles as a marketing tool. Investors thought that an Article 9 fund was by definition more sustainable than an Article 8 fund. That confusion was ingrained in the system.
The definitions were so vague that interpretations differed between Member States, between regulators and even between asset managers. What was considered a sustainable investment in the Netherlands could be rejected in Germany. The technical standards that were supposed to provide clarity only created more complexity. Fund managers spent millions on compliance departments, legal advisers and reporting systems. Money that did not go to investment research, did not flow back to clients, but evaporated in bureaucratic processes.
The result was predictable. In 2023, the great wave of downgrading began. Hundreds of funds that had previously classified themselves as Article 9 switched back to Article 8. Not because they had become less sustainable, but because the legal risks had become too great. Fear of enforcement and reputational damage drove managers to take the safe middle ground. Ironically, the regulations intended to combat greenwashing led to a form of greenhushing, whereby companies made their sustainability efforts less visible.
The data requirements were a story in themselves. Principal Adverse Impact indicators, taxonomy alignment, scope 3 emissions: the information that funds had to report simply did not exist in many cases. Companies, especially outside Europe, did not provide the necessary data. Asset managers had to choose between making estimates or accepting gaps in their reports. Both options undermined the credibility of the entire system.
Now, the European Commission is finally acknowledging what the market has seen for years: the SFDR is not working. The proposed revision, now dubbed SFDR 2.0, aims to introduce a genuine categorisation system with clear product labels. Sustainable, transition, non-sustainable: simple terms that investors understand. It sounds logical, but it is exactly what should have happened four years ago.
This is the pattern that makes European regulation so frustrating. First, ambitious rules are introduced without adequate market consultation. Then years of confusion follow as the sector struggles with implementation. Next come the repairs, the amendments, the technical standards that are supposed to clarify the original text. And finally, the whole circus starts again with a fundamental review.
The intention behind sustainable financing remains valuable. Directing capital flows towards a greener economy is a legitimate policy goal. But the execution illustrates everything that is wrong with the European regulatory machine: it is too complex, too theoretical, too far removed from practice. SFDR 2.0 now has the opportunity to do better. Unfortunately, history teaches us not to get our hopes up too much.
Read the original column in Financial Investigator magazine