Did the SFDR improve the quality of retail funds' environmental claims?
The 2° Investing Initiative analysed the communication of a set of retail investment funds to identify their use of misleading environmental impact claims or impact washing after the implementation of the SFDR.
The study focuses on the 454 largest environmentally-focused SFDR Article 8 and 9 funds available in France and Ireland. Their observations include:
- 27% of the funds in the study made environmental impact claims. However, none of these funds could sufficiently substantiate their claims according to the updated UCPD Guidance, indicating a substantial potential legal risk.
- Over two-thirds of the funds making environmental impact claims were classified as SFDR Article 9 financial products.
- There were three times more false or generic environmental impact claims appearing in SFDR Article 9 funds' marketing materials compared to Article 8 funds'.
- Environmental claims were usually general and ambiguous, confused company impact with investor impact, and failed to provide any scientific evidence for them.
- Fund names were the most recurrent area for environmental impact claims deemed to be generic because they suggest impact and there is no evidence to support this suggestion.
- The study also found many misleading environmental impact claims in legal documents (including SFDR disclosures) and marketing materials.
- Most retail investors expect real-world impact from finance products labelled as "green" or "sustainable", even though the majority of them cannot detect impact-washing without external support.
This report reveals many misleading environmental impact claims in legal documents (including SFDR disclosures) and commercial marketing materials.
The current market offering cannot satisfy European retail investors' demand, even though they would be willing to sacrifice some of their returns to achieve their impact targets.
These results highlight the need for stricter regulation and enforcement to ensure that these claims are substantiated and accurate and that asset managers are held accountable for their transparency to avoid potential legal risks.