Complexity and Change: What Asset Managers Need to Know about SFDR

The Current State of Sustainability Reporting

The disclosure regime has largely failed to deliver its intended transparency. Articles 6, 8, and 9 classifications have lost commercial relevance as large allocators increasingly view these distinctions with scepticism. Industry experts widely acknowledge that while the original SFDR had good intentions, the results have missed the mark. 

This scepticism isn't unfounded. Many firms initially upgraded their classifications without making substantive portfolio changes, leading to widespread concerns about greenwashing. The European Supervisory Authorities (ESAs) themselves acknowledge that these classifications have been "used since the outset in marketing material as 'quality labels' for sustainability, consequently posing greenwashing and mis-selling risks."

Proposed Changes and Their Implications

European regulators are now contemplating a major overhaul of SFDR. The proposed shift from a disclosure regime to a labelling system introduces new label categories like “transition / social / governance” and “environmental / impact” in addition to the classic “sustainable” tag. 
  
These changes, while potentially beneficial long-term, create immediate challenges for asset managers. Current compliance investments will require modifications. The introduction of new marketing restrictions and sustainability indicators adds another layer of complexity to an already demanding regulatory landscape.

The Impact on Compliance Operations

The practical implications of these changes extend beyond classification. Asset managers must now consider:

• Data Management: New categories may require different data points and calculation methodologies
• Marketing Materials: Stricter controls on sustainability-related terms in fund marketing
• Portfolio Analysis: Deeper scrutiny of underlying investments' sustainability credentials
• Compliance Systems: Potential overhaul of existing compliance frameworks

While SFDR was originally designed as a disclosure regime, it was quickly misused as a labelling scheme, and this mismatch calls for a fundamental rethink of how firms approach sustainability disclosures.

Looking Ahead

No exact timeline exists, but a coming shift toward more stringent sustainability reporting is clear, even if the specific requirements continue to evolve. Firms must ensure their compliance frameworks are flexible enough to adapt to regulatory changes while maintaining operational efficiency.