The EU Sustainable Finance Disclosure Regulation (SFDR) is a set of EU rules which aim to make the sustainability profile of funds clearer, and easier for investors to understand and compare.

SFDR focuses on pre-defined metrics for assessing the environmental, social and governance (ESG) outcomes of the investment process at a fund level, and is designed to prevent greenwashing and ensure a systematic, transparent and harmonised approach within financial markets. It is part of the EU’s wider Sustainable Finance Framework which is backed by a broad set of new and enhanced regulations that apply across the EU. The SFDR goes hand in hand with the Sustainable Finance Action Plan which aims to promote sustainable investment across the EU, and a new EU Taxonomy to create a level playing field across the whole EU.

These new measures are in response to the Paris Agreement and the United Nations 2030 Agenda for Sustainable Development which created the Sustainable Development Goals in 2015. The SFDR and other regulations are also aligned with the European Green Deal, which aims to see the EU carbon neutral by 2050.

To enable comparison of financial funds, the new SFDR regulation requires funds and mandates to be considered and classified into three categories, as laid out by Articles 6, 8 and 9 of the SFDR.

• Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently screened and excluded from investment mandates by ESG funds, such as coal fired power generation, mining, or tobacco companies. While these will be allowed to continue to be sold in the EU, providing a clear labelling system which defines them as non-sustainable may make these funds harder to market when compared against more sustainable funds.

• Article 8, also known as environmental and ‘socially promoting’, applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.” Investments may include energy companies with a mix of generation assets, and companies able to show clear progress towards better ESG practices. Negative screens may be used to identify suitable investments.

• Article 9, also known as ‘products targeting sustainable investments’, covers products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark.” Investments should have clear ESG benefits as a primary goal, rather than the benefits being incidental to the primary business activity. Positive screens may be used to identify suitable investments.

With a focus on investing for impact, and clearly articulated goals of reducing both carbon emissions and plastic, Archipelago expects to classify the Future of Plastics Fund as an Article 9 fund under the SFDR.