EU's ESG Regulatory Framework: a Study of SFDR

Abstract

In recent years, there has been a growing awareness in the Western world regarding climate change, social inequalities, and the impact of decision-making actors. The lack of regulation in these areas has had a significant impact on individuals' daily lives, leading them to adopt more sustainable lifestyles. This shift has also been reflected in the financial world, with a focus on investing for a positive impact on the planet in addition to financial returns. To guide investors in sustainable investing, the ESG criteria was developed, but the accumulation of different data, reports, and ratings has created a need for clarity. Currently, the European Union is the most involved regulator, enforcing three important regulations aimed at sustainability: the EU taxonomy, CSRD, and SFDR. The objective of this thesis is to undertake an in-depth examination of the core components of the Sustainable Finance Disclosure Regulation (SFDR). Specifically, it delves into the intricacies of Principal Adverse Impacts (PAIs) and the nuanced differentiation between Article 8 and Article 9 classifications at the product level. The subsequent analysis, involving both qualitative and quantitative data, was conducted by collecting information both from the websites of the involved participants and from Bloomberg Terminal. In the segment concerning PAIs, outliers within the data were identified to ascertain the presence of a uniform benchmark across various entities. The analysis seeks to determine whether diverse interpretations of the regulation result in considerably varied values or if there's a common standard that most entities adhere to. The subsequent segment, which delves into the classifications of funds under Article 8 and Article 9, seeks to discern whether fundamental factors influence the distinctions between these two articles. The intent is to provide clarity in an area where a definitive understanding currently remains elusive. The results revealed that, as of now, PAIs lack a consistent pattern. A spectrum of metrics displays diverse values, underscoring the potential for refining these indicators to ensure they are readily comprehensible for end investors. Regarding the distinctions between Article 8 and Article 9, the regression analysis indicates correlations with certain parameters. However, to genuinely discern specific measures that delineate the categorization, further in-depth research is imperative.