Addressing the Flaws of the Sustainable Finance Disclosure Regulation: Moving from Disclosures to Labelling and Sustainability Due Diligence

The EU Sustainable Finance Disclosure Regulation (SFDR) establishes disclosure requirements to tackle greenwashing and ensure transparency for financial products. Contextualising the assessment based on literature on disclosures and indicators in the field of sustainability, as well as sustainability due diligence, this article analyses the SFDR disclosure requirements and its key definitions. It shows that the SFDR does not require that financial market participants (FMPs) cease or remedy the principal adverse impacts connected to their investments. The definitions of ‘promoting environmental and social characteristics’, ‘sustainable investment’ and its requirement of ‘do no significant harm’ are extremely open-ended and have not prevented FMPs from including investments harmful to sustainability, such as in oil and coal. The disclosure of complex ‘proxies’ for sustainable performance, such as investment policies and strategies, as well as a limited use of benchmarked information about positive and adverse sustainability impact cast doubt on the extent to which disclosed information can be understood and effectively drive investors towards sustainable investment products. Enabled by these shortcomings, FMPs have started using the SFDR as a label to claim that their products are ‘sustainable’. This article illustrates how the SFDR could be amended to introduce elements that would better align it with the practice of sustainability due diligence under the future Corporate Sustainability Due Diligence Directive and bring it closer to a labelling regime signalling products with higher sustainability credentials ˗ while still offering investors necessary sustainability-related information about products and entities.