30 January 2023

Don't kill SFDR by adopting strict definition of sustainability, Mirova urges Commission

By Peter Cripps

The CEO of Mirova has warned the European Commission not to become too "strict" in its definition of sustainable investment, or it will risk "killing" its Sustainable Finance Disclosure Regulation (SFDR).

Philippe Zaouati, head of the Paris-based impact specialist fund manager, said he supports the SFDR, arguing that the controversial regulation has helped the market to "self-regulate", with regards to a fund's level of sustainability.

But he warned against making any changes to the regulation that would bring in a more "strict" definition of what constitutes a sustainable investment.

He said there is a danger that this might happen, after the European Securities and Markets Authority (ESMA) – the agency tasked with overseeing the SFDR – wrote to the Commission asking it to clarify its definition of a sustainable investment.

"The Commission is now moving from self-regulation to explaining Article 8 and 9," said Zaouati. "To do this, they will have to do it very strictly or be accused of greenwashing. We are still waiting for the answer from the Commission."

Article 9 funds are those that have sustainable investment as their objective, Article 8 funds are those that promote environmental or social characteristics, while Article 6 funds are thosethat do not claim to integrate sustainability aspects into their strategy.

Currently only 3% of funds have classified themselves as meeting the criteria of Article 9, but if that decreases to 1% due to a stricter definition of sustainability by the Commission it would effectively render the regulation useless, Zaouati argued.

"We could fall to less than 1% of Article 9 funds, and if we fall to 1%, or there are no Article 9 funds left, it would mean the regulation is dead."

He said ESMA's clarification that in order for a fund to be classed as Article 9 100% of assets need to be sustainable caused numerous funds that had previously been classified as Article 9 to reclassify themselves as Article 8.

He revealed that following ESMA's clarification, Mirova had rejigged its listed equities fund to allow it to maintain its Article 9 status.

"We wanted to stay Article 9, so we reshaped our ESG analysis to show that our investments are making an impact," he said. "It led to a small rotation, of between 5% and 10% [of our holdings], because for some companies we found it too difficult to explain [why they are impactful]."

Mirova describes itself as an "impact investor" and says all of its funds are classified as Article 9 under the SFDR, although Zaouati stressed that an Article 9 fund is not necessarily an impact fund.