There certainly have been recent cases of regulators cracking down on greenwashing, acknowledged Stéphane Badey, partner at Arendt Regulatory & Consulting. But overall, “as of today, you can comply with the obligations. I mean, the SFDR is nothing else than a transparency exercise. So if you are transparent about what you do as a firm--obviously you have to comply with the obligations, even if they are a bit technical--normally there’s no reason why the regulator will come down hard on you.”
Badey believes the issue really “is not regulatory driven, but more client driven,” or driven by NGOs, both of “which are looking at what firms are doing and saying.” Investors and activists are likely to discover if a portfolio does not match up with what’s written on the tin. “It’s more a reputational issue.”
Isabelle Lebbe, partner in the investment management practice at the law firm Arendt & Medernach, agrees that greenwashing “is very, very much a reputational issue.” That said, if any funds “have been missold, you can be sure that regulators will follow up immediately, ask questions, make verifications and potentially impose fines or other types of sanctions. We clearly expect that.”
Financial regulators have been “very clear in their communication that SFDR is a piece of regulation that they take very seriously,” and have stressed to fund executives to “make sure that it is properly implemented, in particular here in Luxembourg”, Lebbe says.
“It’s very challenging,” she adds, “because it’s not necessarily just a question of misselling, it’s a question of, sometimes, limited possibility to control what’s going on in your investee companies. If you are investing somewhere as a professional in the financial sector, and you make a commitment and you do your best in relation to the that commitment, then you invest in companies which do not comply with what they they had promised, then what do you do? What can you do? You will still be on the hook.”
Does this mean that fund firms might be hesitant to launch funds labelled as article nine, to avoid making promises they can’t deliver on? Firstly, “you should not use article eight or article nine as a label, they are not labels. The [European] Commission has been very clear on that,” says Badey. “It’s convenient now that we say article six, eight and nine, but the reality is that you do whatever you do in terms of investment strategy, and then based on what you’re going to disclose, you’re going to fall under article eight disclosure, article nine disclosure”.
“I’m pretty sure that in six months’ time,” as regulations come into practice, “we’re going to talk about taxonomy aligned products, sustainable investment products and principal adverse impacts consideration. We’re going to move away from articles six, eight and nine.”
Deliver on promises
Lebbe has seen a slight slowdown in article 9 fund introductions in the first part of this year, as some firms wait for further clarity from regulators and signals from the market. But this is a short-term blip. While fund lawyers have been “cautious” in advising firms, “because we don’t want them to get in to trouble, we’re certainly not holding them back when it comes to going far into SFDR and into commitments regarding sustainability.”
“We tell them that they have to make sure that they can deliver on the promise they make, because we see investors, we see regulators, we see competitors looking very closely at those who go far into” SFDR, she says. “So it’s not going to be easy to oversell. I would say, in the future, less and less easy. And that’s what we tell our clients.”
A version of this article first appeared in Delano’s October 2022 print edition