Fears over status of impact investing under SFDR review

As the EU finalises long-awaited reforms to the Sustainable Finance Disclosure Regulation (SFDR), market participants have raised concerns over the status of impact investing.

At the start of the month, Impact Europe and a host of impact investors co-signed an open letter to the Commission calling for a distinct category for impact funds.

While the European Commission had included impact as a suggested category when it polled market participants two years ago on their preferences, it was absent from recommendations by the bloc’s advisory group, the Platform on Sustainable Finance.

Responsible Investor reported last week that the Commission is not expected to propose an impact category. This is reportedly due to challenges around the definition of the term and what approach to take, as well as a lack of understanding from retail investors of the differences between impact and sustainable investing.

The Commission may, however, introduce additional disclosures that fund managers can apply to measure and show the level of impact investing of a product, RI understands.

This latter solution has been backed by leading sustainable finance academics, who supported a policy briefing by the Sustainable Finance Observatory (SFO) calling on the EU to ensure that the bloc’s sustainable finance regulatory framework properly integrates impact investing.

The briefing, presented to the Commission this month, sets out four recommendations, including that impact-generating financial products in one of the three overarching categories “should be recognised by additional disclosure requirements”.

Nicola Koch, head of retail and impact investing at the SFO, told RI that there is still a high risk that impact investing will not be included in the revised framework.

“It’s extremely alarming that it’s put into question, because including impact is a very clear recommendation by the platform. If the commission steps back from that, this is a tremendous missed opportunity,” he added.

As part of platform discussions over the past two years, Koch said he had advocated for impact funds to be given a standalone category. However, this saw “tremendous pushback”, he said. “The Commission perceived it as too burdensome or complex to have a fourth category.”

Koch claimed the SFO briefing recommendations are “not only politically feasible, but also in line with consumer expectations and the leading academics in the field”.

Contributors to the paper included University of Maastricht’s Rob Bauer, University of Hamburg’s Timo Busch and University of Kassel’s Christian Klein. It has also been backed by ShareAction, WWF and Climate & Company.

Hard to navigate

Speaking at Morningstar’s Sustainable Investment Summit last week, Deka Investments’ head of sustainability and corporate governance Ingo Speich warned that the uncertainty around impact was unhelpful.

“If you’re an institutional investor and own a large impact fund, and you hear something is going on with these product categories in SFDR, then you wait,” he said.

The unclear future of the SFDR more broadly, he said, “is a big issue for planning our approach to new products, strategy and resources”.

This, combined with divergent national definitions of impact, has made the space difficult to navigate, he added.

“The impact category was, from our perspective, quite difficult due to the changing regulation and the impact definition. The regulatory authorities had a specific view on impact measurement and in Europe, for example, it depends on the country where you are in terms of impact measurement. In Switzerland and France, the view on impact measurement is a different one than the conservative one in Germany.”

This also affects retail investors, he said, who find it difficult to compare impact products.

The European Commission did not respond to a request for comment.