Impact investors have united to voice concerns about the European Union’s Sustainable Finance Disclosure Regulation (SFDR), saying the regulation doesn’t recognise the difference between positive impact investment and investments in sustainable practices.

The SFDR was created to enhance transparency around sustainability-related investment claims, prevent greenwashing and to channel capital flows toward sustainable economic activities. But it needs more clarity, according to our survey of 21 impact fund managers.

Late in 2023, along with the Global Steering Group for Impact Investment (GSG) and several National Advisory Boards, we wrote a joint letter of recommendation to the European Commission during its consultation on the SFDR. 

Additional labelling needed to show impact

Together we advocated for the introduction of an additional labelling system. It is crucial to distinguish between strategies for investing in sustainable activities and those intentionally seeking a positive social or environmental impact.  

The regulation is missing a full understanding of the activities and principles that set impact investing apart from other sustainable finance actors. A key distinction: impact investors do not just invest in sustainable activities, e.g. those aligned with the EU Taxonomy (in line with the European Green Deal objectives). Rather, they invest with a specific intention to generate a measurable positive social or environmental impact (intentionality) that would not happen otherwise (additionality).

What is an impact investment?

To illustrate the distinction between sustainable and impact investing, consider this example: A sustainable investor seeks companies with more sustainable business practices to benefit stakeholders, like a carpet manufacturer using environmentally friendly materials and less pollutant production methods.

While an impact investor targets companies addressing underserved societal or environmental issues beyond their operations – such as providing quality employment and training opportunities to marginalised individuals. These companies prioritise impact alongside profit, striving to make a meaningful difference in areas where support is lacking (see Unicus example in Norway).

‘there is evident interest from individual investors in intentionally using their capital for good. Presenting all relevant choices, including a positive impact strategy, is essential.’ 

Impact intentionality and additionality as well as positive impact indicators were omitted from the SFDR. But several recommendations from impact fund managers ask for a more granular understanding of these concepts in the legal language of the regulation. In the joint letter, we state that including more detail on these concepts is crucial. 

We write: ‘It is vital to address the widening investment gap for achieving UN SDGs by 2030. Urgently needed are positive impact investment strategies to close this investment gap and to answer end investors’ appetite for social and environmental impact alongside financial returns.

From the experience in the French market and with crowdfunding platforms, there is evident interest from individual investors in intentionally using their capital for good. Presenting all relevant choices, including a positive impact strategy, is essential.’ 

Increased risk of impact-washing

There was concern among this group that the market currently uses SFDR categories as proxy labels for too wide a variety of investing activities. When matched with the absence of explicit consideration for impact investment strategies, this contributes to an increased risk for green-washing, as well as social-washing and impact-washing.  

Impact fund managers also recommended the regulation enhance its focus on reporting claims of positive impact (using IMM – impact measurement and management), as opposed to the regulation’s current focus on negative impact (Principal Adverse Impacts). 

This point was included as another way to characterise the additional nature of impact investing, but also to ease reporting burdens. According to impact fund managers, the regulation has a disproportionate reporting burden for unlisted assets (smaller operations), small enterprises and emerging markets.  

Impact fund managers also sought more clarity on how SFDR aligns with other legislations, for example EuSEF (European regulation of social entrepreneurship funds).   

European impact sector unites with #UnitedForImpact

There has been an upswell of other recommendations from the European impact sector. The #UnitedForImpact initiative – joined by more than 30 impact funds from 14 countries aligns with many of the recommendations in our letter.  

Separately, the Dutch financial market’s regulator, AFM, proposed better labelling, specifically for “transition”, “sustainability”, and “sustainability impact”. 

While we’ll only know the result of this advocacy effort in time, it gives us some confidence to see the collective voice of the impact sector putting forward its views to ensure an enabling policy framework.
 
on 16 April 2024 Impact Europe launched its Impact Manifesto ahead of the European Parliament elections.

Jana Bour is the Head of Policy and EU Partnerships at Impact Europe. She previously worked with EPRA, leading policy work on the EU Green Deal and its sustainable finance agenda.