So much for the Green Deal in finance. The much-vaunted European Union‘s rules on sustainable disclosure have zero impact, a study from four prestigious universities suggests. Investors do not flock to green funds, managers do not care about the sustainability of their portfolios.
European policymakers hoped their flagship sustainable-investment rulebook would corral capital into cleaner assets. A sweeping study has now cast doubt on that ambition. Academics from Stanford University, Harvard Business School, the University of Amsterdam and London Business School poured over thousands of mutual-fund portfolios and millions of flows before and after the launch of the Sustainable Finance Disclosure Regulation (SFDR) in 2021. Their verdict was blunt. “Our results suggest that the SFDR was ineffective in influencing the behaviour of investors and mutual funds,” the researchers wrote.
The paper, published by America’s National Bureau of Economic Research, found that the rule did not tempt fresh money into ‘light-green‘ Article 8 funds or ‘dark-green‘ Article 9 funds. Nor did it prod managers to purge carbon-heavy holdings. “The introduction of the SFDR did not result in higher flows into either light or dark green mutual funds,” the academics observed; “nor did it materially alter the sustainability of their portfolios.”
Coming up short
That conclusion will jar officials in Brussels, who promoted SFDR as a pillar of the European Green Deal. The regulation obliges every fund sold in the bloc to say whether it ignores sustainability (Article 6), promotes environmental or social characteristics (Article 8) or pursues a specific sustainability objective (Article 9). Optimists claimed the labels would reward greener strategies and expose greenwashers. The new evidence suggests otherwise.
Paul Smeets, professor of philanthropy and sustainable finance at the University of Amsterdam, helped lead the research. “We looked at two possible effects that the introduction of SFDR could have had,” Mr Smeets told Financial Times. “First, whether it changed investment flows. In other words, whether funds that called themselves Article 8 or Article 9 attracted more capital than they did before those labels were available to them.”
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The academics tracked net subscriptions across roughly 26,000 funds. Capital kept moving much as before. Managers gained no fund-flow dividend from sporting a greener badge. “We found no meaningful evidence that the regime achieved either objective,” Mr Smeets said.
Labels without lure
The team then examined the greenness of portfolios. They measured weighted carbon emissions, LSEG environmental ratings and Morningstar carbon-risk scores. The changes barely registered, moving by less than a tenth of a standard deviation. In practical terms, the average Article 8 or Article 9 fund looks no cleaner today than in early 2021.
SFDR’s supporters argued that market discipline would make managers live up to their claims. Instead, many managers quietly diluted them. When Brussels hinted at tougher scrutiny of Article 9 funds in 2021, hundreds of firms reclassified their products as Article 8. “We found that there were no notable changes to the inflows or outflows of those funds that chose to downgrade, compared with funds that retained their Article 9 status,” Mr Smeets noted. Investors shrugged.
(Without changes) it’s just another massive regulatory tick-box exercise. And heaven knows there are already enough of them. — Andrew Clare, Bayes Business School
Complex disclosure plays a part. As Mr Smeets put it, “It’s not that investors don’t care about sustainability, it’s that SFDR is too complicated for retail buyers.” The research team ran an experiment that replaced pages of jargon with a simple traffic-light label. Savers flocked to the green light and shunned the red. Brussels is now mulling something similar and has extended its consultation on SFDR reform until March 17th.
Rules that weary
Critics in the industry feel vindicated. “I think awareness of the Article categories, especially among retail investors, is close to zero,” said Andrew Clare, professor of asset management at London’s Bayes Business School. “It does suggest that the industry/regulator should do more to make people aware of the meaning of the categories, otherwise it’s just another massive regulatory tick-box exercise. And heaven knows there are already enough of them,” Mr Clare added.
Money managers also grumble about cost. The European Commission estimates one-off implementation expenses of €500m and annual bills of €246m for the fund sector. “The amount of time, money and effort that the industry has put into this is disproportionate when you look at the results,” said Hortense Bioy, global director of sustainability research at Morningstar.
Under the hood, SFDR groups every fund into one of three boxes. Article 6 funds may ignore sustainability altogether. Article 8 funds must promote environmental or social characteristics but face no binding portfolio test. Article 9 funds must invest entirely—bar cash and hedges—in assets deemed sustainable by the manager.
Commission sees shortcomings
In theory the hierarchy should send most money towards Article 9. In practice Article 8 dominates, with €6.5tn in assets versus €317bn for Article 9, according to Morningstar. “It has cost a lot. There has been regulatory fatigue and it hasn’t worked because it’s too complex. All this new information was just confusing everyone,” Ms Bioy added.
Europe’s markets watchdog, the European Securities and Markets Authority, last week issued a note on “addressing greenwashing risks in support of sustainable investments”. It listed good and bad practices, but stopped short of prescribing hard thresholds. The Commission, chastened, now speaks of “shortcomings” in the law and hints at pruning disclosure demands. A red-amber-green label would hand retail savers the same intuitive cue that works for food nutrition.
There has been regulatory fatigue and it hasn’t worked because it’s too complex. — Hortense Bioy, researcher at Morningstar
The academic study piles pressure on officials to tighten definitions. Managers volunteered to downgrade roughly 350 Article 9 funds to Article 8 during the second half of 2022 after new guidance suggested only companies aligned with the EU taxonomy would count as sustainable. Yet the downgrades triggered no investor exodus. That indifference, the authors argue, shows that labels alone do not reshape capital flows unless investors trust and understand them.
Back to the drawing board
The findings also call into question Europe’s reliance on disclosure as a means to police environmental claims. When labels cost little to adopt and carry scant commercial risk, managers have every incentive to stretch them. Without a credible threat of investor flight, greenwashing thrives. Policymakers may need to supplement labels with quantitative hurdles—say, portfolio-level emissions caps—if they want to drive real change.
For now, Brussels must decide how far to rewrite the rulebook. A modest fix may simplify templates and add a traffic-light. A bolder reboot—SFDR 2.0—could impose hard metrics and harmonise terminology with the EU’s separate taxonomy of sustainable activities. Either way, the goal remains the same: spur Europe’s vast savings industry to finance the green transition rather than merely talk about it.
Europe has long prided itself on leading global climate policy. SFDR was meant to show how finance could accelerate decarbonisation. Instead, the regulation has so far produced more paperwork than progress. Unless the forthcoming overhaul can match transparency with simplicity and rigour, the bloc risks repeating the exercise, only to discover again that disclosure without teeth cannot tame greenwashing.
