Speaking up about SFDR – at Impact Week

SFDR has the potential to allocate more capital for impact and so it matters to impact investors. Though intended as a transparency regime, the regulation means much more than that. Its articles 6, 8, and 9 are used as labels, partially because there is a strong demand for labels in the market and partially because the regulation makes distinctions in transparency rules for different levels of ambitions.  

Yet, the ambition to invest intentionally to generate a positive impact is somehow missing. That’s why stakeholders in the impact ecosystem have raised an important question:  

Is SFDR still fit for purpose?   

As part of Impact Week 2023, Impact Europe (formerly EVPA) – The Investing for Impact Network – brought together influential figures in the impact investing ecosystem to discuss SFDR from various perspectives. This diverse panel included Jose Moncada Durruti, Founder and CEO at La Bolsa Social and Managing Director at Fondo Bolsa Social, Emiliano Giovine, President at Global Alliance of Impact Lawyers (GAIL)  Europe and Senior Associate at RP Legal & Tax, Martina Mettgenberg Lemière, Head of the Impact Finance Observatory at FAIR, and Eleonore Bedel, Chief Sustainability Officer at BNP Paribas Wealth Management.  

The panel coincided with the European Commission's public consultation on SFDR implementation, providing a platform for stakeholders to assess its effectiveness and express their opinions on potential revisions while there’s still time to adapt the regulation.  

To kick things off, the panellists expressed a resounding commendation for the EU's bold move in adopting SFDR, which marked a pivotal shift in prioritising sustainability in finance. Panellists celebrated as a monumental step forward the fact that ESG reporting has shifted from optional to mandatory. Yet, amidst the applause, a sobering reality emerged. Despite its noble intentions, SFDR fell short of adequately integrating impact asset managers. This hiccup, as the panellists illuminated, posed significant challenges for the sector during the crucial implementation phase (since 2021). 

Experience with the Finansol label 

Representing the perspective of the French impact market, Martina Mettgenberg Lemière raised concerns regarding the misuse of transparency categories as labels, as recent product downgrades from Article 9 to 8 have led to a lack of confidence in Article 8 and 9 funds. 

Pointing towards a solution for SFDR, Martina cited the success of the Finansol label in France as a model that has significantly scaled up the social finance sector in the country. This particular example highlighted the effectiveness of labels in reducing social washing, directing investments to social impact and building trust among retail investors.  

The Finansol label serves as a vital compass for investors seeking to align their savings with their values. Martina shared that, “Social funds comprise nearly 10% of all employee savings in France and a quarter of retail investors express a desire for a social dimension in their savings, according to a September 2023 survey.” Proof of that is the capital growth of 90/10 funds under the Finansol label over the last 10 years, “going from 2.5 billion euros in 2012 to 15.3 billion euros now.” 

Martina also highlighted SFDR’s absence of social indicators for positive contributions, calling for the establishment of a Social Taxonomy. In response, 40+ French financial organisations, including FAIR, are crafting social indicators to guide investments to social impact. Ultimately, these indicators may serve as a model for voluntary reporting and potential future EU regulation. 

Wish list for EU lawmakers  

Jose Moncada Durruti shared insights from his role as the managing director of an impact fund in Spain, Bolsa Social Impacto, shedding light on the challenges social investors encounter. As SFDR is a regulation crafted for the transparency on negative impacts to sustainability factors of investments in listed assets, Jose emphasised the mismatch between the regulation and the needs of funds investing in unlisted, small and illiquid enterprises dedicated to positive social impact. In his experience, the disclosure requirements burden small social enterprises without providing meaningful information to stakeholders, considering their minimal or irrelevant adverse impacts.  

Jose argued for a shift towards a labelling system that includes an impact product category with clear criteria, facilitating the identification of “additional” impact funds while minimising exhaustive reporting demands. As Jose articulated, "There's a misconception that Article 9 is solely for impact funds, but not all of Article 9 is about impact. Whereas all impact funds should fall under Article 9. So, let's advocate for a labelling system that includes a distinct impact label with clear criteria." 

Jose also called for universal reporting obligations under SFDR, encompassing both positive and negative impacts, irrespective of financial actors' involvement in sustainable finance, to enhance investor decision-making. Finally, he emphasised the importance of acknowledging the EuSEF regulation under a future impact label: “The EuSEF regulation is simply designed to create a label for social impact investing... My last wish would be to take this piece of regulation that already works well and incorporate it into SFDR. When you are a EuSEF, you are clearly an additional impact fund.” 

Getting granular  

Representing the private wealth management viewpoint, Eleonore Bedel underscored the importance of distinguishing genuine sustainability from mere marketing claims under SFDR. While acknowledging the positive impact on sustainability awareness, she pointed out challenges regarding the complexity of SFDR, particularly for less financially savvy clients. Investors and financial advisers often struggle with lengthy and complex reports, as well as the scarcity of reliable and comparable data. Eleonore argued that certain aspects of SFDR can disillusion investors regarding sustainable and impact investing. She called, instead, for a revised regulation that inspires trust in the sector.  

She also presented a comprehensive wish list for policymakers, underscoring the importance of nuanced fund labelling. This included incorporating more granular information to depict different levels of ambition within a single product label, ultimately enhancing the comparability of financial products. In Eleonore's words, “We need a labelling system, but with granularity. It is not just black or white. You are not just bad or good. You can be good, you can be very good, you can be very, very good. This makes a significant difference for investors, as their product preferences vary.” 

Regarding next steps, Eleonore suggested leveraging the progress achieved so far in the SFDR revision instead of starting from scratch, acknowledging the considerable time and financial investments already made by financial market participants. However, she emphasised the importance of ensuring that the new version incorporates simplified reporting criteria, clear language and alignment with other existing regulations like the Markets in Financial Instruments Directive II (MiFID II). 

Downgrades erode trust in SFDR  

Emiliano Giovine contributed to the discussion with his insights as a legal impact specialist. He highlighted foundational issues with SFDR, such as its lack of legal clarity, leading to implementation challenges. This is evident in the concerning number of downgrades from articles 9 to 8, damaging trust in the legal framework. 

Giovine also pointed out the lack of harmonisation in definitions with other existing EU regulations. Stressing the importance of consistency, he remarked, "My real wish is that we agree on a uniform definition for a more harmonised regime. This entails ensuring that the definition of environmentally sustainable investment aligns across the Taxonomy, SFDR, and CSRD, for example. This way, we avoid missing the basics from a definition point of view." 

Emiliano further enriched the discussion by presenting insights from the Impact by Law event held during Impact Week, co-organised by Impact Europe, GAIL, Cottino Social Impact Campus, and the Global Steering Group for Impact Investment (GSG). During this event, participants collectively identified key priorities for strengthening the legal framework, such as: 

 > Improving comparability, availability and reliability of impact data 

> Developing an SFDR label system, including an impact product label with clear and tailored reporting requirements for impact 

> Establishing harmonised frameworks and standards for disclosure 

> Enhancing support for small and medium-sized enterprises to disclose sustainability information 

> Implementing ESG-integrated policies within the governance structures of both funds and downstream corporate sectors 

Polling the audience  

Almost 80% of respondents present at the panel expressed their belief that a distinct impact label under SFDR would help attract more capital to impact investing. 

This resounding support mirrors the sentiment we have encountered in our interactions with impact practitioners and experts. It validates the content of our response to the European Commission’s public consultation on SFDR.  

But we didn’t stop there. We’ve rallied a coalition to call for an SFDR impact label in our joint letter to Commissioner Mairead McGuinness and Valdis Dombrovskis, Executive Vice-President for An Economy that Works for People.  

What’s next?   

Looking ahead, the Commission has affirmed its commitment to carefully review stakeholders' input. On our side, Impact Europe will continue to engage on the topic in bilateral talks and public debates to ensure the impact ecosystem's voice is not just heard, but amplified!