It was a master plan. The Sustainable Finance Disclosure Regulation was supposed to send massive private capital flows into green investments, finance the Green Deal, and allow Europe to set an example for the rest of the world. Not a nonbinding directive, but an ambitious framework meant to discipline the financial sector and crush greenwashing.
Four years later, the dream has become a bureaucratic nightmare. Sustainable funds are bleeding assets. The sector is groaning under an avalanche of regulation that at one point was being supplemented weekly with new interpretations, opinions, and commentaries. And the best part: no one is happy. Not the regulators, not the investors, and certainly not the fund managers who have to implement the monster.
A schizophrenic system
Of all market participants, 84 percent consider the information provided inadequate. Not just slightly below par, but outright unfit to inform investors properly. Another 82 percent desperately call for clarification of basic concepts. If a test produced scores like that, the author would be sent straight back to the drawing board.
The European Commission and the regulators seem to be watching fundamentally different movies. Brussels deliberately opted for an open, principles-based approach to mobilize private capital. The regulators, by contrast, focus on protecting investors from being misled and on imposing fines. The French AMF has already issued the first penalty to an asset manager. More sanctions will follow.
The result is a schizophrenic set of rules that neither triggers capital flows nor effectively protects against greenwashing. A hybrid construction combining all the disadvantages of both approaches, with none of the benefits.
Article 8, Article 9, and the great confusion
The Sustainable Finance Disclosure Regulation works with two categories: Article 9 for highly sustainable products and Article 8 for all other sustainability-related products. It sounds simple but is hopelessly outdated. The classification is detached from concrete investment strategies, leaving everyone unclear about what these labels actually mean. Is a fund that invests in coal but also in wind turbines Article 8? Probably. Does that help the investor? Absolutely not. In the meantime, Article 8 has become the greenwashing article, a category filled with controversial companies that can claim to be green under the Sustainable Finance Disclosure Regulation.
Look at the United Kingdom or Switzerland. Their frameworks are tied to investment themes and strategies. You know what you are getting. But no, Europe had to do things differently again—more principled, more open, more complex. And therefore worse.
On top of that, the Sustainable Finance Disclosure Regulation was deliberately not designed as a labeling regime, even though the market is screaming for labels with objective minimum standards. More than 50 percent of respondents in the consultation process wanted product categories. The regulators did not listen.
The choir of the desperate
By now, every country with an outspoken regulator has launched its own “solution.” The Netherlands introduced three product categories in november 2023. France followed with four. Germany wanted three as well, but defined them slightly differently. ESMA called for completion of the EU taxonomy and for using it as the only definition.
A cacophony of national egos convinced of their own wisdom. Each with good intentions, all believing they are right, yet together creating mostly chaos. Who can keep track of this? Which version applies where? And how do you implement all these different national clarifications in a pan-European fund?
The Portuguese promise
Maria Luís Albuquerque, the designated European Commissioner for Financial Services, promised improvements during her november 2024 hearing. She wants to transform the Sustainable Finance Disclosure Regulation into a product-categorization system with clear criteria. She wants a focus on positive impact and transition investments, which are currently underexposed.
A nice story. But strikingly, the Portuguese commissioner did not say a word about expanding the EU taxonomy, something several regulators are clamoring for. A deliberate choice, or a sign that even she no longer knows how to climb out of this swamp?
The harsh reality
Because let’s be honest: in times of political chaos, economic malaise, and geopolitical threats, the Sustainable Finance Disclosure Regulation is nowhere near the top of the priority list. The market dreamed of a quick and fundamental overhaul. Forget it. The financial sector will have to live for many years with a Sustainable Finance Disclosure Regulation that nobody wants: too complex for practical use, too vague to be effective, too rigid to adjust, and too ambitious to abandon.
Meanwhile, the legal and compliance industry keeps busy. Even simplifications, adjustments, and clarifications must still be implemented in a legally sound way. The consultants are making a fortune, the sector groans under administrative burden, and the investor? Still has no clue.
This is Europe at its worst: noble intentions sinking into bureaucratic overregulation and national fragmentation, undermining any ability to act decisively.
Welcome to the sustainable future. It just didn’t turn out very sustainable.
Han Dieperink is chief investment officer at Auréus Vermogensbeheer. Earlier in his career he was chief investment officer at Rabobank and Schretlen & Co.