Navigating Marketing Under SFDR: What Funds should and shouldn’t say in their marketing communications.
Ensuring compliance with the rules set by the Sustainability-Related Financial Disclosures Regulation (SFDR) is pivotal when communicating about your fund. So far, investors (i.e. FMPs) have heavily focused on SFDR annexes and disclosures over the last months. But what actually lies at the heart of SFDR is alignment between marketing/external communications and the actions of the fund.
Below we outline specific dos and don'ts of fund marketing in the post-SFDR-world to guide you through the process of staying compliant and avoiding negative regulatory scrutiny.
Avoiding Greenwashing: Specific Keyword Use
To avoid Greenwashing, SFDR has provided guidelines on the use of keywords in your fund's name and marketing material. It's stricter than you think, so make sure to check your communications well if you’re not an Article 9 Fund!
For example, terms such as “ESG”, “green”, “sustainable”, ”social”, “ethical”, “impact” or any other ESG-related terms are only allowed when supported by concrete evidence of sustainability characteristics. Using these terms lightly can potentially lead to non-compliance and reputational damage or fines.
For instance, a fund name like "Climate Impact" is acceptable if it invests in companies focused on climate change mitigation or adaptation. A "Sustainable Energy" fund name, however, is not permissible if a fund primarily invests in carbon capture and storage, as it’s misleading in terms of the objectives.
The difference between “Sustainable Characteristic” and “Sustainable Objective” should also be noted. The first one applies to Article 8 funds. They do not come with binding outcomes but rather focus on promoting certain mindsets and behaviors. Sustainable Objectives describe a significantly bigger commitment.
ESMA and AFM has put a lot of guidance, and while it is still evolving, our interpretation is as follows:
| Fund Category | Recommended Marketing Narrative | Example keywords |
|---|---|---|
| Article 6 | Article 6 funds don't have an explicit sustainability objective. Therefore, marketing language for these funds can reflect that sustainability risks are taken into account in the investment process but should not suggest that these funds aim to achieve any particular sustainability outcome | Risk-aware Risk-managed Sustainability-considered Risk-return balanced |
| Article 8 with low % of sustainable investments | For Article 8 funds, sustainability is a notable feature but not the primary objective. Therefore, marketing language can emphasize that these funds promote environmental or social characteristics, and the companies they invest in have good governance practices. However, it would be misleading to suggest that these funds aim to make a positive sustainability impact as a primary objective in the way that Article 9 funds do. | Green ESG-focused Climate-positive Socially responsible Promotes environmental characteristics ESG-friendly Ethical investment |
| Article 9 and 8+ with high % of sustainable investments |
Article 9 funds have positive social or environmental impact as their primary objective. Therefore, these funds can use marketing language that suggests a strong commitment to sustainability. This could include terms such as 'sustainable investment fund', 'aims for a positive environmental/social impact', 'ESG-focused', or 'climate-positive'. However, it's important to remember that the claims made in the marketing materials must still be substantiated and accurate. | Sustainable investment Impact Investing Positive impact Sustainable future ESG impact fund |
Accuracy and Consistency: The Golden Rule
All investor information provided under SFDR needs to meet high standards of accuracy and consistency. As detailed in the ESMA guidelines, the golden rule of SFDR is:
"The information provided to the investors to evaluate proposed funds must be accurate, fair, clear, not misleading, simple and concise (Article 8(3) and 9(5) SFDR)."
Therefore, funds must verify that all disclosures, from fund documentation to marketing materials, are in line with these principles. AFM - i.e. the financial market regulator within the Netherlands - unpacks this statement into one page of marketing communications guidance:
What’s most important is that every single sustainability claim in your marketing (and we do mean every single one) has to be based in reality and substantiated by your official reports and actions of you or your portfolio companies. If a claim about carbon neutrality is made, it must be substantiated with facts, such as a third-party verified emissions report. Generic claims, like “we support ESG objectives” are likely to receive heavy scrutiny. Having a few minor ESG investments is no longer enough to allow for inclusion of sustainability claims in your marketing.
Ensuring Comprehensibility and Accessibility
Sustainability-related information must be comprehensible and easily accessible. Complex sustainability terminologies should be explained clearly to avoid misunderstandings - always cater to your client’s level of subject matter expertise. It's essential to ensure that the information is not hidden in a maze of jargon but easily found and understood by investors. Following these guidelines can ensure that your fund's marketing remains compliant with SFDR and its mission to increase transparency in the financial market.
MIFID regulation further complements SFDR governing criteria on how you can sell and communicate your funds to LPs. Customers can specifically ask about subjects such as PAI consideration, EU Taxonomy alignment and share of sustainable investments. You should also consider these in all communications with your clients and make sure to ask potential customers of your fund the right questions!
Err on the side of caution!
One of the key objectives of SFDR is to reduce greenwashing in the financial sector. It aims to align sustainability claims, marketing language, and the actual impact of financial products. While many Financial Market Participants (FMPs) focus on the task of disclosing their impacts, they often overlook the key component of aligning these disclosures with their marketing and communications.
Unless the majority of your investments are sustainable, you should avoid using terms like “Sustainability” or “Impact” in your naming and marketing. The guidelines are vague and non-specific for now, providing only a few examples of acceptable wording. However, these guidelines will get more specific and possibly more strict as time goes on.
Make sure that all sustainability or impact related statements are not over exaggerated and backed up by data or numbers. Keep things factual - even though it’s “marketing”, SFDR forces funds to communicate in the most matter-of-fact, truthful way possible when it comes to impact.
Sources:
Sources for supervisory briefings and guidelines related to marketing communications:
ESMA supervisory briefing: https://www.esma.europa.eu/sites/default/files/library/esma34-45-1427_supervisory_briefing_on_sustainability_risks_and_disclosures.pdf
AFM Marketing Communications Guidance (for Netherlands):
https://www.afm.nl/en/sector/actueel/2023/juni/consultatie-leidraad-duurzaamheidsclaims
Legal text of SFDR:
SFDR Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019
SFDR Technical Requirements of Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022
1st Q&A of the European Commission on the SFDR (14 July 2021)
2nd Q&A of the European Commission on the SFDR (30 May 2022)
Clarifications of the European Supervisory Authorities on the secondary legislation related to the SFDR (2 June 2022)
Supplementary Q&A of the European Supervisory Authorities on the secondary legislation related to the SFDR (17 November 2022)
