Put transition finance at the centre of SFDR reform

(...) The law has done little to channel capital towards investments that support the transformation of essential sectors

The European Commission’s revision of the Sustainable Finance Disclosure Regulation is a perfect opportunity to focus some much-needed attention on transition finance to ensure polluting sectors have the means to change and, where necessary, activities can be retired in a fair and orderly way.

The SFDR has improved sustainability information, but it has also proven complex and costly for financial institutions and not delivered full benefits to investors. 

Disclosures made under the law have often confused rather than informed retail investors and disclosure-based differentiation has been repurposed into product labelling. This has resulted in an unbalanced market: a narrow segment of products invested in assets deemed “sustainable”, and a much broader universe “promoting” sustainability characteristics.

This has complicated the matching of products to investors’ preferences, increased mis-selling risks and done little to curb greenwashing. Nor has it helped channel capital towards genuine transition investments, which remain largely indistinguishable within the lower tier of sustainability-themed products. (...)