For years, many funds claimed to be “impact-oriented” without having to prove their commitment, leading to widespread concerns about greenwashing. To combat this, the European Union introduced the Sustainable Financial Disclosure Regulation (SFDR) in 2021, a landmark framework that imposes transparency on the sustainability claims of financial market participants. This regulation requires funds to categorize themselves based on their environmental and social impact, ensuring greater accountability.
Among these categories, Article 9 funds stand out as the most rigorous, reserved for funds that aim to achieve significant sustainability outcomes as a primary objective. But how exactly are these funds reshaping the investment landscape? Let’s explore their growing influence on investors, startups, and society.
SFDR and the three article categories
Under the SFDR, all funds in the EU must now classify themselves into one of three categories:
- Article 6: These funds do not focus on sustainability or impact and follow traditional investment strategies.
- Article 8: These funds integrate at least one Environmental, Social, or Governance (ESG) metric into their strategy, but their investment choices may not necessarily align with the EU’s sustainability goals. They could invest in sectors such as oil and gas and may even cause harm to sustainability objectives.
- Article 9: The most stringent classification, these funds are required to have sustainability as their primary objective. They must demonstrate measurable positive impacts aligned with the EU’s sustainability goals and avoid causing harm to other environmental or social objectives.
The introduction of Article 9 funds plays a crucial role in guiding investments toward achieving net-zero greenhouse gas emissions by 2050. As of 2024, nearly a thousand Article 9 funds exist across various asset classes, managing over €300 billion. These funds are key to understanding whether capital is truly flowing into projects that will help meet the EU’s long-term sustainability goals.
But what impact do these funds have on European climate innovation? And how are they influencing investors, startups, and broader society?
The impact on investors
The SFDR’s most significant lever is its requirement that funds disclose how they pursue impact targets through their investments. This transparency forces both funds and their investors to reconsider their impact objectives. The introduction of Article 9 and its counterpart, Article 8, has led many institutional investors to set goals for how much of their portfolios should be allocated to these funds, making it more attractive for fund managers to offer such opportunities.
However, there is debate among some investors about whether embracing ESG and impact-oriented structures like Article 9 is at odds with maximizing financial returns. Due diligence costs are higher for Article 9 funds, and the additional capability required can consume more resources. Nonetheless, the question ultimately boils down to a belief in two key ideas:
- Climate change is real, and its effects will worsen over time.
- Society will increasingly value solutions to climate change, driving consumer behaviour and policies that favour these investments.
If investors believe in these premises, they will be more inclined to invest in companies that offer true solutions to sustainability challenges, expecting those companies to outperform in the long run. Embracing Article 9 frameworks is simply a strategic way to maximize the chances of picking future market leaders.
The impact on startups and companies
For startups, particularly those focused on climate technology, Article 9 brings both challenges and opportunities. Eligible companies may hesitate due to the high costs associated with proving their Article 9 suitability. Gathering, validating, and reporting the required sustainability data, maintaining Life Cycle Assessments (LCA), and proving ongoing capability can be resource-intensive. However, these requirements are becoming commonplace for any business that seeks to scale sustainably, and the benefits far outweigh the costs.
For founders of climate tech companies that meet Article 9 criteria, the rewards are significant:
- Access to a larger group of sustainability-focused investors, including the potential for non-dilutive funding.
- Improved talent acquisition and retention, as employees increasingly prioritize sustainability in their career choices.
- The potential for corporate acquirers and investors to offer a premium for validated sustainability efforts.
As more capital flows into sustainable solutions, more companies are likely to grow beyond the startup phase and become successful businesses, scaling their impact significantly.
Moreover, there is a growing interest among young entrepreneurs and seasoned professionals alike in becoming impact-oriented founders, which bodes well for the future of climate innovation.
The Impact on society as a whole
On a broader level, the SFDR is a key pillar supporting the successful implementation of the European Green Deal, a set of policy initiatives aimed at reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. The ultimate goal is to create a climate-neutral economy by 2050.
The Green Deal focuses on transforming the EU into a modern, resource-efficient, and competitive economy. This transformation requires transparency in financial markets and strong measures to prevent greenwashing. However, some critics argue that the vagueness of certain SFDR criteria has opened the door to further greenwashing attempts. A 2022 review by Morningstar found that 23% of investment products labelled as Article 8 did not live up to their ESG principles.
These criticisms are not unfounded. Shortly after the SFDR was introduced, some funds tried to exploit the framework by claiming Article 8 or 9 status despite weak sustainability objectives. National regulators, however, were quick to investigate and reprimand these funds, resulting in significant disruptions among fund investors. This set a new standard for compliance and has discouraged further greenwashing attempts. Additionally, larger fund investors have become more adept at assessing the sustainability and impact claims of funds, including those aligned with Article 9.
A powerful tool for a sustainable future
After a somewhat turbulent start, the SFDR now stands as a powerful tool against greenwashing in the EU and is expected to have a lasting influence on investors, companies, and society as a whole. By holding funds accountable for their sustainability claims, Article 9 funds are driving a financial shift toward truly impactful investments.
As transparency improves and impact becomes a priority, Article 9 funds are set to play an increasingly pivotal role in the EU’s efforts to create a sustainable, climate-neutral economy, benefiting investors, companies, and society in the long term.
