New legislation has been in force within the European Union since March 2021. The Sustainable Finance Disclosure Regulation (SFDR) aims to get more money for positive impact. By demanding greater transparency from providers of financial products, it is expected that other investment choices will eventually be made.
The goals that the European Union has in mind with the SFDR are very positive and ensure a great focus on sustainability. However, it remains to be seen to what extent it will really help private investors to invest more sustainably in a simpler manner.
The SFDR will not only force financial parties to integrate sustainability into investment processes (which is a very impressive development), but it will also ensure greater transparency – and transparency is an inherent part of sustainability. An important condition is that this information must be presented in a manageable way so that the private investor will also benefit from it.
The danger of information overload
The risk of an information overload is lurking because providers have to report complex information according to certain templates and specific terminology. Instead of private investors having to look for sustainability information themselves, this information is now offered to them in reports on funds.
That is a nice step, but there is still a lot to criticize about the way in which the information is presented. Investment advisors have a big role to play in this, but the vast majority of independent investors don’t benefit from this.
On the other hand, we should not underestimate the sustainable private investor. Recent VBDO research has shown that there is certainly a need for more information about the sustainability of financial products and that people are indeed willing to do their homework, provided the information that investors receive is workable.
Still a lot of hurdles to take
What private investors need most is a sustainability label. And here lurks another danger from the SFDR. The division of investment funds into different articles reads like a label. Article 6 is grey, article 8 is light green and article 9 is dark green. Whoops, there you have your label.
And then explain to private investors that they should not see it that way, that one Article 8 fund is not necessarily comparable to another Article 8 fund. That the scope for interpretation is so great that own research into different funds remains essential. After all, the SFDR was never intended as a label, nor is it designed in that way.
In short, many hurdles still have to be overcome before the SFDR can really help private investors make sustainable choices. We are on the cusp of major changes in sustainable investing.
The European package of legislation still has many snags and much needs to be adjusted. That said, we as Europe have irrevocably embarked on a more sustainable path. In the long run, this will make it easier for private investors to invest sustainably.
This piece was previously published on Financial Investigator.