SFDR has helped drive fund decarbonisation, study finds

Article 8 and 9 funds decarbonised more on average than other sustainable funds after SFDR implementation, say researchers.

The introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR) was followed by a drop in the average portfolio emissions of EU funds claiming to invest sustainably, a new working paper published by the European Corporate Governance Institute has claimed.

The working paper, written by academics from the University of Navarra, found that funds which classified themselves as Article 8 and 9 saw a decarbonisation of their portfolios after the introduction of SFDR.

Using a sample of around 4,000 active equity funds, the researchers found that in the year after SFDR came into force, Article 8 and 9 funds decreased their Scope 1 and 2 emissions more than a series of control groups including funds managed by US signatories to the PRI, Article 6 funds and other sustainable funds not subject to the SFDR.

This decarbonisation was especially driven by Article 8 and 9 funds with relatively higher portfolio emissions prior to the implementation of SFDR, according to the study.

Researchers also split out a sample of French funds, which have been required to make climate-related disclosures since 2016 under France’s Article 173. As these funds were already subject to transparency, the decarbonisation effect post-SFDR was less than in the rest of the sample.

The findings also show that, while part of the decarbonisation was due to return-related changes to portfolio weighting, the effect was also driven by exits from high-emitting companies, as well as real-world decarbonisation.

The academics used SFDR to test a wider hypothesis that the introduction of transparency regulation should be followed by a decarbonisation of funds which claim to invest sustainably, as it highlights potential inconsistencies between claims and performance.

Overall, the researchers said, the results support the theory that mandatory disclosures can incentivise decarbonisation by asset managers. However, they suggested that further research could be done looking at performance on sustainability topics other than emissions, as well as index and non-equity funds.

The European Commission has been keen to understand how effective SFDR has been as a transparency tool. A recent consultation on reforms to the framework solicited opinions on its effectiveness in increasing transparency in a number of areas, including the integration of sustainability risks and consideration of adverse sustainability impacts.