Not all European regulations are good. Under the Sustainable Finance Disclosure Regulation (SFDR), part of the EU Green Deal, asset managers must disclose information on sustainability. The objective is thus more transparency and openness in this area. However, from the start the directive was used as a means to classify funds.
There are three possibilities: the grey Article 6, the light green Article 8 and the dark green Article 9. Article 6 is for those who do not understand this directive and for anyone who consciously wants to invest in a socially irresponsible way. Article 8 is the greenwash article, that is investments with a sustainable label, but which, due to the many controversies at companies that apparently still fall under Article 8, are not that sustainable at all. Article 9 is for the sustainable champions and that is where the market will move in the coming years.
Now, the problem with this classification is that the technical criteria will only be announced at a later stage. Whoever implements a directive in this way can expect the market to wait until there is more clarity about the classification. After all, there seems to be no point in switching now if the law later turns out to be different. That frustrates the other objectives of SFDR, namely combating the climate crisis and accelerating the energy transition. People want green, but because of the confusion that has arisen, we will remain grey for longer. Moreover, the complex regulations are used as an excuse not to do anything with sustainability for the time being.
Sustainable market is growing fast
The market for sustainable investments has become very large. It is also the fastest-growing part of all investments. In this respect, it is not surprising that the interest in the SFDR Directive and the subsequent Taxonomy Directive is high. What makes it difficult is that sustainability is a subjective concept. What is sustainable for a church in a rural area may not be sustainable for an environmental organisation in a metropolis. Also, individual countries emphasise different elements.
In France, the power of trade unions is an important component, but in the United States, they attach more importance to diversity within a company. In that respect, it is good news that Europe is trying to objectify sustainable principles, but then all the lobby groups have to agree. In this case, the quick is the enemy of the good. The technical SFDR standards must be released as soon as possible, but there is no fixed date for this release.
It is even said that application is possible even without these standards. That is possible, of course, but not under the conditions imposed by Brussels. There are people who are convinced that nuclear power plants are the solution to the climate crisis and that the real cause of the problem is that there are too many people on the planet. There are sustainable investors who no longer want to invest in oil and there are sustainable investors who are convinced that the oil sector is instrumental in the energy transition. But we do not know what Brussels thinks about that.
Without direction, people just do what they like
By letting the market swim, the risk of greenwashing increases. As long as no direction is given, people will do whatever they like. The chance that the various Member States will then give their own interpretation to SFDR increases. The Spanish regulator has already said that it will provide its own criteria if the implementation of the technical standards is not forthcoming. Not exactly the ideal outcome..
I do not think asset managers are waiting for different criteria per Member State. Instead of providing the promised guidance, SFDR is simply creating more uncertainty. Unfortunately, there is no alternative, but it does not mean that we have to stop being sustainable. There is no other option; after all, the opposite of socially-responsible investing is socially-irresponsible investing, and that is obviously not desirable.
Some time ago, I had a conversation with a coffee trader. He had once worked for the Max Havelaar Foundation (now Fairtrade Netherlands), but had left. He was still in the coffee business, but now in an organic variant. Max Havelaar may have had the noble intention of paying coffee farmers better for their coffee, but it forgot to look at other sustainability criteria as well. The moment a farmer receives more money for his coffee, this is an incentive to produce more. This does not happen so quickly with coffee. It takes some time before a new bush produces beans. In the short term, however, the harvest can be increased by spraying heavily with pesticides.
Automatic pilot threatens
One day, when a shipment of coffee could no longer enter the port of Rotterdam because of an excessively high percentage of pesticides, this insight came. I mentioned that I had always thought there was an aftertaste to Max Havelaar coffee and simultaneously handed him a box of tea bags. The question from the coffee trader was whether the tea bags had been thought through properly. While I confirmed that this was not the case, he outlined the dilemma of child labour weighed against the education these children did receive. His conclusion was that a lot is possible in terms of sustainability, as long as it is thought through properly.
Now, that is also a mistake that many investors make if they are right several times in a row. Then the risk of automatic pilot looms, while that is precisely the time to think carefully about it. My advice is to do that with every investment decision and then to take sustainability characteristics into account to the best of one’s knowledge and belief. Then we can wait a little longer for the technical standards from Brussels.
Han Dieperink is an independent investor, consultant and knowledge expert for Fondsnieuws, Investment Officer Luxembourg’s Dutch-language sister publication. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co. He is currently active as chief commercial officer at Auréus Asset Management. Dieperink provides his analysis and commentary on the economy and markets. His contributions appear on Tuesdays and Thursdays on Fondsnieuws.nl