SFDR’s future in doubt amidst regulatory criticism

The future of the sustainable finance disclosure regulation (SFDR) in the EU appears increasingly uncertain, argued Helen Slater, regulatory manager at FE fundinfo, during an interview with Paperjam. She pointed out that, with regulatory confusion and political scepticism growing across Europe, “SFDR is likely to see considerable upheaval in 2025.” Slater also noted that the current direction suggests a shift away from retail investors and questioned whether European regulators would maintain their commitment to sustainability frameworks, such as the UK’s sustainability disclosure requirements (SDR) and the EU’s own SFDR.

What’s at stake

Slater noted that while the UK’s SDR is in the process of being rolled out, the SFDR is expected to undergo significant changes in 2025. She referred to criticism from EU commissioner for financial services and the savings and investments union (SIU), Maria Luís Albuquerque, who has contested that the SFDR is “not fit for use by EU investors” due to its confusing rules and widespread misuse within the industry. This has led to growing speculation that the EU may abandon the SFDR and overhaul the framework entirely.

Amongst the key recommendations Slater proposed for a potential SFDR revamp was a lowering of the sustainable asset allocation threshold from 90% to 80%, aligning it more closely with the UK model. She found the current 90% requirement to be overly restrictive, noting that it negatively impacted fund liquidity by limiting the ability to hold cash or non-sustainable assets.

Slater also mentioned that SFDR could benefit from the introduction of a labelling system akin to that of the UK’s SDR. This, she suggested, would help reduce the ambiguity currently faced by investors and asset managers alike.

Why the urgency

Slater pointed out that under the current geopolitical climate, especially in the United States, there is growing political resistance to environmental, social, and governance (ESG) criteria and sustainable investments. She observed that this pressure has begun influencing the European landscape as well, intensifying concerns about regulatory coherence and investor trust.

A central issue, Slater found, is the inconsistent disclosure practices by fund managers. She explained, “What we observe currently is that fund managers are either over-disclosing or under-disclosing what they’re investing in. They often can’t be bothered to correct it because reclassifying all your funds is an enormous administrative burden.” According to Slater, a clearer definition of greenwashing and stronger, more effective sanctions are essential to ensuring both compliance and investor confidence.

To improve transparency and accessibility, Slater recommended exploring ways to display a fund’s ESG characteristics more meaningfully, such as incorporating them into the Priips key information document (KID). This would help investors better understand the sustainability profile of products without having to navigate dense regulatory text.

Past lessons

“The hope is that the rewritten SFDR regulations will not lead to the disappearance of green or ESG funds, as was seen with ethical funds in the past,” Slater warned. She emphasised that if the SFDR is not carefully restructured, there is a risk that sustainable and green funds could face the same fate as ethical funds, which once disappeared from the market.

She elaborated that ethical funds, which were defined solely by exclusion--such as avoiding the tobacco or arms sectors--“struggled and ultimately disappeared.” In contrast, the SFDR aims to classify sustainable investment products more holistically. However, if the regulations become too burdensome, they may deter innovation and lead to a similar decline.

Slater concluded that the challenge for EU policymakers would be to “strike the right balance”--preserving investor protections and regulatory rigour without discouraging the growth and diversity of the sustainable investment sector. The coming year may prove pivotal in determining whether the SFDR evolves into a more user-friendly framework or becomes a cautionary tale of overregulation, Slater predicted.