The European Union is currently revising the Sustainable Finance Disclosure Regulation (SFDR), a comprehensive set of guidelines introduced in 2021 to promote sustainable investments and combat greenwashing. While the regulation aims to educate investors about the positive impacts of their choices, it has inadvertently placed a heavier financial burden on funds that adhere to the highest environmental, social, and governance (ESG) standards. Despite modest success in distinguishing genuine sustainable investment vehicles from others, challenges remain, particularly for impact investors operating outside Europe. This article delves into the implications of SFDR and calls for a more balanced approach in its revision.

Since its inception, SFDR has been instrumental in differentiating between investment vehicles that genuinely aim for sustainability and those that do not. The regulation has fostered collaboration among investors focused on inclusive finance, leading to harmonized reporting practices. However, this progress comes at a cost. Funds that prioritize ESG factors are shouldering an increased financial burden, akin to apple growers paying fees to teach consumers that fruit is healthier than pastries. This imbalance undermines the very purpose of encouraging sustainable investments.

The regulation’s focus on European investments poses significant challenges for investors active in low- and middle-income countries, especially in the Global South. Reporting requirements tailored for the EU's legal and business environment often fail to align with the realities of these regions. For instance, smallholder farmers and microentrepreneurs, who are most affected by climate change, find it impractical to report on carbon footprints due to a lack of suitable alternatives. These discrepancies highlight the need for clearer guidelines on acceptable proxies and alternative data for smaller enterprises.

The broader universe of socially responsible funds ranges from those avoiding harm to those actively improving ESG factors. Innovative funds, which pioneer new markets and scale up proven ideas, face the challenge of complying with SFDR while seeking to create impacts beyond what the regulation addresses. While SFDR primarily focuses on environmental impact, its relatively light touch on social impact can be a drawback for investors prioritizing social objectives. Nevertheless, some have benefited from the emphasis on environmental considerations.

Moving forward, stakeholders must advocate for a fairer distribution of costs associated with SFDR compliance. Impact investors, including banks, cooperatives, and microfinance institutions, need to engage with European Commission officials reviewing the regulation. With legislative initiatives like the “Omnibus simplification package” on the horizon, reaching out to Members of European Parliament is also crucial. Now is the time for inclusive finance providers to make their voices heard and shape the future of sustainable finance regulations.

To ensure that SFDR truly serves its intended purpose, it is imperative that all stakeholders participate in the review process. By joining forces and providing input, they can help create a regulatory framework that promotes sustainable investments without placing undue burdens on those leading the way. As one presenter at the European Microfinance Week aptly put it, “Don’t let others write the law that regulates you!”