SFDR 2.0: Progress Made but Concerns Remain – Insights by Rosl Veltmeijer

The European Commission’s proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR), known as SFDR 2.0, seek to enhance transparency in sustainable investing by setting clearer ESG (Environmental, Social, Governance) disclosure standards for financial products. Rosl Veltmeijer, Portfolio Manager at Triodos Investment Management, offers a critical analysis of these developments, highlighting both advancements and unresolved challenges.

Key Updates in SFDR 2.0

• New Fund Classifications: The existing Article 6, 8, and 9 categories are replaced by three distinct product categories: ESG Basics, Transition, and Sustainable. Each reflects increasing levels of sustainability ambition.
• Exclusions-Based Requirements: Introduction of mandatory exclusion criteria for investment products, providing a more scientific definition of harm and thus curbing potential greenwashing.
• Elimination of Entity-Level Principal Adverse Impact (PAI) Reporting: This reduces administrative burdens while focusing on relevant sustainability data.

Areas of Concern

Unequal Transparency Across Funds

A significant shortfall lies in the uneven application of disclosure requirements. Only investment products within the three new categories must provide ESG disclosures, while non-categorised funds—where most harmful activities could occur—are exempt and disclosure remains voluntary. This gap risks allowing potentially damaging investments to avoid scrutiny, undermining the protection of investors and the integrity of sustainable finance.

Insufficient Clarity and Comparability for Retail Investors

While setting a 70% portfolio alignment threshold for ESG Basics, Transition, and Sustainable categories marks progress, the flexibility within these criteria could lead to inconsistency:

• ESG Basics is particularly vulnerable to greenwashing due to vague requirements, absent ex-ante sustainability targets, and a broad interpretation of ESG integration.
• The Transition category prioritizes environmental objectives, neglecting social transitions—an equally pivotal aspect of sustainability.
• Conflicting threshold levels between SFDR (70%) and ESMA guidelines for fund names (80%) may confuse investors.

Loopholes in Exclusion Criteria

Though exclusion criteria align better with EU legislation, weak restrictions remain, especially for ESG Basics funds. For example, investments may still involve financing fossil fuel activities (excluding coal and lignite), potentially allowing unfettered support to oil companies without any transition plans, misleading investors about the true sustainability of their holdings.

Conclusion

SFDR 2.0 represents a constructive step towards more transparent sustainable finance, particularly through product reclassification and exclusion-based criteria. However, according to Rosl Veltmeijer, the regulation falls short by not establishing a level playing field across all investment funds and leaving loopholes that could facilitate greenwashing. Without addressing these weaknesses, investor trust may wane, and the potential of sustainable finance to drive genuine environmental and social impact may be compromised.

About the Author:
Rosl Veltmeijer is a seasoned portfolio manager with Triodos Investment Management, specializing in sustainable fixed income investments. She has extensive experience in sustainability assessments and actively contributes to sustainability initiatives within the investment community.

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