EU finance rules due to be rolled out in stages, firms including fund houses, insurers and pension funds that provide financial products or services in the European Union will have to begin disclosing how sustainable they really are. New EU legislation, called the Sustainable Finance Disclosure Regulation (SFDR), aims to help drive €1 trillion ($1.19 trillion) into green investments over the next decade, iron out the patchy climate-related information currently provided by financial market participants, and give firms with genuinely sustainable products an edge. The SFDR rules should make it harder for market participants to talk up environmental credentials without following through with action, so-called ‘greenwashing’, and could also determine how big a slice firms can win of the fast-growing market for products with a focus on environmental, social and governance (ESG) issues.
Set to roll out in several stages over the next two years, SFDR contains reporting obligations at both the company and product level, although investment managers say regulators’ last-minute release of final details of some of the rules is hindering their preparations. All funds must disclose in their pre-contractual information how they factor sustainability risks into their investment decisions. Additionally, those funds promoting environmental or social characteristics, or sustainability objectives, must explain both in their marketing and on their websites the objectives and how they plan to meet them. Within funds, greenwashing could include one that is marketed as ‘sustainable’, but which includes lots of companies with high carbon emissions. The lack of a firm definition of greenwashing means it is often in the eye of the beholder.