Dutch financial watchdog warns against use of SFDR terms to promote products

AFM publishes guidelines on sustainability claims, describing the use of SFDR classifications in product promotion as ‘undesirable’.


Dutch financial watchdog AFM has told fund managers that it regards the inclusion in marketing material of disclosure classifications under the EU’s anti-greenwashing legislation SFDR as “undesirable”. 

The warning from the AFM was included in guidance published today (Wednesday) on sustainability claims for financial institutions and pension providers. 

Under the SFDR, Article 8 funds are those that promote environmental or social characteristics, while Article 9 ones must pursue environmental or social objectives. 

Since the regulation came into effect in 2021, concerns have been raised, including by the AFM, that SFDR terminology could be used by the market as a label that attests to a fund’s sustainability rather than – as is the case – a classification that determines the disclosure obligations it must comply with under EU law.   

The AFM said that an SFDR classification “in itself should not be presented as substantiation for a certain degree of sustainability of a product”.

“Using an SFDR classification as a means of promoting products is undesirable,” it added.  

The level of ambition within funds that fall under the SFDR classifications “can vary widely”, the AFM added. “Therefore, the classifications by themselves do not provide a conclusive indication of a certain sustainability level of the product.” 

When providing information on classifications of products under the SFDR, the AFM said it is important “not to give the impression that such classifications have been assigned by a third party”.

Last month, the European Commission released a wide-ranging consultation on investor experiences with SFDR and potential changes. The 44-page questionnaire covers topics ranging from proposals to abolish the Article 8 and 9 system, potential changes to disclosure requirements and whether the purpose of the regulation itself is still relevant. 

It also floated the possibility of introducing four categories for funds under SFDR, broadly mirroring those put forward by the FCA in the UK. 

Three principles for the market 

The AFM’s new guidance sets out three broad principles for financial institutions along with examples to illustrate good and bad practices, which it said were “inspired by situations the AFM has encountered in practice”. 

The regulator said sustainability claims should be accurate, representative, and up-to-date; specific and substantiated; as well as understandable, appropriate and easy to find.  

On the use of SFDR terms, AFM gave the example of one market participant that stated on its website that the investment funds it invests in are “under the SFDR Article 9 label”.  

This market participant “makes a sustainability claim based on a non-existent label”, the AFM said in response. “The classification of a fund under Article 8 or 9 SFDR is not a sustainability label and therefore should not be presented as such,” it added.  

In another example, a financial firm “places on its website alongside its investment funds a homemade green seal that reads ‘SFDR Article 8′”.

With this seal, AFM wrote, “the wrongful impression may be given of third-party verification of the level of sustainability of the products in question”. It added: “The reader is thus misled about the meaning of SFDR classifications.”

To underline its focus on keeping information up to date, AFM gives the example of an entity that highlighted that it scored “8.5 on sustainability based on a sustainability rating”. But when a client clicked on this score, “it turns out that this ESG rating was issued five years earlier. Meanwhile, more recent ratings are available.”  

On the importance of substantiation, AFM provides examples of poor practice in relation to net zero and biodiversity pledges. 

Regarding the former, it cites a case where a market participant provides no explanation of how it will achieve its target or whether it has set “intermediate targets and how this sustainability target compares with the current situation”. 

On biodiversity, AFM gives the example of a financial institution that backs up its goal to prevent biodiversity degradation by 2050 by pointing to its signing of the Investor Statement Finance for Biodiversity Pledge, “without further explanation”. 

“The communication lacks an explanation of the meaning of the pledge,” AFM wrote. “A 2050 target is a long-term goal. Without an explanation of the intended path towards this long-term objective, it is impossible to verify whether the market participant will stick to its communicated objective.”

The publication of AFM’s guidelines followed a consultation with the market, which saw seven responses, all from industry associations.