Weak sustainability categorisation can institutionalise greenwashing: EDHEC

As the European Union reforms its Sustainable Finance Disclosure Regulation (SFDR), the EDHEC Climate Institute has warned weak or inconsistent standards could institutionalise rather than mitigate misleading sustainability claims.

Under the changes, the EU is moving from a disclosure framework into a product categorisation regime.

"That change raises the stakes for the regulator. Once products are assigned to recognised sustainability categories, those categories perform much of the communicative work before any product-specific claim is made," the research note by EDHEC Climate Institute said.

"If the underlying standards are weak or internally inconsistent, the new framework may therefore institutionalise rather than mitigate misleading sustainability claims."

To mitigate this, the institute pushes forth the idea of "substantiated categorisation", which moves beyond formal eligibility criteria, such as investment thresholds or recognised methodologies.

Instead, products should demonstrate the coherence of the chain linking category objectives, product objectives, investment strategies, implementation mechanisms, indicators and their plausible implications for the real economy.

"This is particularly so where the framework claims not only to improve investor information and protection, but also to support the mobilisation and allocation of capital towards the transition of the real economy," the report read.

"Such a claim requires products to justify the coherence of the chain linking the objective represented by the category, the objective pursued by the product, the investment strategy adopted, the investment approaches through which that strategy is implemented, the indicators used to assess its operation and progress, and its plausible implications for outcomes in the real economy."

While the framework already exists, the research note pushes to tackle the challenge to apply that principle consistently throughout the categorisation regime.

"The debate has understandably focused on thresholds, exclusions and exemptions, and on how they affect the integrity of the categorisation framework. Those are necessary questions. They are not, however, the only ones the revised regime must answer," EDHEC Climate Institute programme director Frédéric Ducoulombier said.

"Once the regulator creates sustainability categories, it gives them meaning. That creates responsibilities. Product qualification must therefore do more than satisfy formal criteria."