SFDR 2.0: Progress Made, But Is It Enough? — Insights from Rosl Veltmeijer

The European Commission’s proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR), termed SFDR 2.0, aim to enhance transparency and fight greenwashing in financial products by refining sustainability disclosures and frameworks related to Environmental, Social, and Governance (ESG) factors. Rosl Veltmeijer, Portfolio Manager at Triodos Investment Management, offers a critical analysis of these developments.

Key Changes Under SFDR 2.0

• New Investment Product Categories: SFDR 2.0 replaces the existing Article 6, 8, and 9 fund classifications with three new categories:

  • Sustainable
  • Transition
  • ESG Basics

• Exclusions-Based Requirements: These criteria introduce a scientific definition of harm, enhancing the rigor of sustainability claims.

• Removal of Entity-Level Principal Adverse Impact Reporting: This reduces administrative burden but may sacrifice less useful sustainability data.

Areas of Improvement

Veltmeijer welcomes some amendments like the exclusions-based approach that concretely defines harm and the reduction in certain reporting burdens. These changes promote clarity and potentially better align sustainability efforts with investor protection.

Critical Concerns Highlighted

1. Lack of a Level Playing Field

• Only categorised funds must disclose sustainability information; for non-categorised funds, disclosures remain voluntary.
• This asymmetry risks allowing potentially harmful investment products to avoid transparency while sustainable products face scrutiny.
• Veltmeijer argues for mandatory reporting of harm across all funds to prevent greenwashing and hidden risks.

2. Insufficient Clarity and Comparability for Retail Investors

• To qualify for the new categories, at least 70% of the portfolio must comply with sustainability-related claims.
• The flexibility within categories, especially ESG Basics, can lead to loose interpretations and greenwashing because of vague ESG integration criteria and lack of outcome-oriented assessments.
• The Transition category mainly targets the environmental green transition, paying inadequate attention to social transition metrics due to complexity.
• The coexistence of different thresholds (70% portfolio alignment for SFDR categories vs. 80% for ESMA fund naming guidelines) may confuse investors.

3. Weak Criteria and Loopholes

• Despite alignment with EU legislation, ESG Basics criteria allow financing new or ongoing fossil fuel activities except coal and lignite.
• This loophole may mislead investors into supporting fossil fuel projects with no transition plans while believing their investments are ESG-compliant.

Conclusion

SFDR 2.0 marks a positive step towards better sustainability disclosure but falls short of setting a comprehensive, coherent standard. Without closing loopholes and ensuring equal transparency across all investment products—categorised or not—the regulation risks enabling greenwashing and undermining the potential of sustainable finance.

Veltmeijer urges policymakers to strengthen the framework to safeguard investors and truly advance environmental and social impact.

About the Author: Rosl Veltmeijer

Rosl Veltmeijer is a seasoned portfolio manager at Triodos Investment Management, specializing in fixed income impact funds. With over two decades in sustainability assessments and impact investing, she also serves on the Dutch Fund and Asset Management Association’s Sustainability Committee and holds multiple degrees in economics, social banking, and investment management.

For investors seeking reliable, transparent green finance options, understanding SFDR 2.0’s implications is crucial. Stay informed to ensure your investments align with both environmental goals and genuine sustainability standards.

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