Greenwashing of ESG Funds under SFDR
The French regulator AMF issued a document recommending that the minimum environmental standards be included in the classification of ESG funds under SFDR to reduce the possibility of greenwashing.
In SFDR (Sustainable Finance Disclosure Regulation), Article 8 and Article 9 are classified as “Light Green” and “Dark Green” respectively, and funds that meet these two conditions can be regarded as ESG funds.
Although SFDR is proposed to improve the transparency of ESG disclosure, AMF believes that in the current situation, the financial industry has different understanding of Article 8 and Article 9, and SFDR does not set minimum ESG standards for them, which may lead to the problem of greenwashing.
AMF’s Solution to Greenwashing Problem
AMF believes that SFDR should introduce minimum standards in the classification of Article 8 and Article 9. Only after the fund meets these standards can it be effectively labeled as ESG fund. Specifically, AMF proposed the following measures:
- Maintain ESG fund classification rules and introduce minimum standards. AMF believes that SFDR has been widely recognized in Europe at present, and there is no need to make obvious changes to it. It is only necessary to introduce minimum standards (first introduce environmental standards, and then consider social standards). Meanwhile, the minimum standard of Article 9 needs to be stricter than that of Article 8;
- Clarify the definition of sustainable investment. At present, SFDR’s requirement for Article 9 classification is that “only sustainable investment can be included”, but there is no clear definition of sustainable investment. Financial institutions have different understanding of the definition, which leads to unintentional greenwashing. AMF suggests clarifying the definition of sustainable investment and introducing the concept of transition assets (covered later in this article);
- Incorporate EU Taxonomy into Article 9 classification rules. The sustainable activities in Article 9 can be regulated from the perspective of EU taxonomy. AMF suggests that the minimum standards for sustainable activities should be set first, and then gradually improved according to the development of classification;
- Supervise the investment behavior of asset management companies that issue ESG funds. The asset management companies that issue Article 8 and Article 9 funds also need to take ESG measures in their investment decisions. AMF recommends that a negative list be prepared to monitor the investment behavior of these companies;
- Announce the principal adverse impacts of ESG funds in investment. AMF proposes to publish the main negative effects of Article 8 and Article 9 funds in investment to help investors choose suitable funds. These impacts should be comparable between different products;
AMF Proposes “Transition Assets”
AMF believes that in addition to the relevant definitions such as sustainability, the concept of “transition assets” can also be introduced into the classification of Article 8 and Article 9. At present, SFDR has not defined transition assets, and AMF has proposed two methods to define this concept:
- Define transition assets according to investees’ transition plan in CSRD. CSRD requires enterprises to disclose the development of ESG and can introduce third-party certification. In the process of disclosing the transition plan, financial institutions can define transition assets based on this information;
- Define transition assets according to EU Taxonomy. At present, the EU classification has not defined transition assets, but according to the report “Taxonomy Extension Options Supporting a Sustainable Transition” released by the Platform on Sustainable Finance in 2022, EU Taxonomy may extend and define more items like transition assets;
AMF believes that transition assets can also be included in ESG investment, and Article 8 and Article 9 funds can invest in these assets to reduce the occurrence of greenwashing.