The power of sustainability disclosure: unlocking the potential of SFDR category improvements

Published

May 2025

Figure 1. Number of EU products (share-class level) reporting each SFDR categorization in the EET disclosure since SFDR adoption at various observation intervals between May 2021 and March 2025. Source: ICE based on EET Data

But what impact has this regulation had on the net asset value (NAV) performance of investment funds? A recent ICE study analyzed changes to SFDR categorization of funds alongside the fund valuation. The ICE study found that changes to the SFDR classification to an upgraded level have a significant positive impact on NAV growth, highlighting the importance of sustainability disclosure in driving investor interest and liquidity inflows.

Research findings

The ICE study analyzed the NAV growth rates of 40 investment funds, which had undergone a change in SFDR categorization of either Article 6 to 8 or Article 8 to 9 over a 12-month period before and after a fund’s announcement of its SFDR "category improvement".

To prevent distortions related to dividend distributions, the sample universe contained only accumulation classes and, to avoid distortions arising from the popularity of exchange-traded funds, the sample universe contained only non-listed funds. Finally, the sample universe was chosen to represent the highest variability of asset classes, simulating the diversity of products available in the market. Categorization changes were observed between October 2023 and February 2024.

The results, as demonstrated in Figure 2 - where each relative time point on the x axis represents one month before or after the category change event - showed that the communication of SFDR category improvements led to a sustained and statistically significant increase in NAV growth, starting from four months after the announcement. This effect persisted and amplified over time, with the highest impact observed 12 months post-announcement. One year on from the category improvement event, there is a 101% probability of the fund having a higher NAV growth rate, as compared to the base period of two months before the change.

Figure 2. Monthly growth rate of investment funds' NAV from one year before the SFDR category improvement event to one year after. Note: The y axis shows a percentage point increase in the NAV that can be attributable to the category change (i.e. once other external factors such as inflation and market movement has been excluded). Source: ICE Data1

Theoretical framework

The study's findings are consistent with the theoretical framework of sustainability disclosure,2 which suggests that enhanced sustainability credentials attract increased capital inflows, thereby boosting liquidity and NAV growth. The study also highlights the importance of differentiating through sustainability credentials in an increasingly competitive market landscape, where European investors have been seen to be prioritizing ESG factors in their allocation decisions.

This preference was certainly borne out by sustainability fund inflows in 2023 which reached over $100 billion globally,3 however, it might appear that the shine is wearing off a little more recently according to a report by Morgan Stanley. Global sustainability fund inflows only amounted to $54.7 billion in 2024,4 a significant decrease on the previous year, and 4.8% less than inflows into traditional funds - a reversal on previous years. But this is still in the context of the global sustainable fund universe ending the year at a new annual high of $3.56 trillion in assets.5 This represented an increase of 4.8% since December 2023, and with sustainable AUMs more than doubling since December 2019.

Market effects

The study's findings have implications for the investment industry, highlighting the potential for sustainability disclosure to drive market effects beyond the individual fund level. The findings suggest that the communication of SFDR category improvements can lead to a spillover effect, where funds with stronger sustainability credentials attract increased capital, leading to additional inflows into the underlying assets held by these funds. This demand-driven mechanism exerts upward pressure on the NAV of these funds, effectively reinforcing their performance. Such an effect, being more directly linked to fund-level dynamics, is expected to be stronger than the spillover effect observed in broader asset markets.

Greenwashing and market distortions

However, the study also highlights the potential for greenwashing, as SFDR categorization (into Article 6, 8 or 9 funds) is determined by asset managers themselves, with minimal verifiable and validated standards. This point is further illustrated by additional observations made in the ICE study, which looked at reported sustainability indicators of those funds which had improved their SFDR category. It is notable that of the 40 funds making a category change, only 13 reported additional indicators for both the environmental and social themes.

This may lead to asset managers overstating their sustainability credentials, which could result in distortions in investor perception of the fund’s credentials and, therefore, inefficient capital allocation. This underscores the necessity for the regulatory framework and independent monitoring mechanisms to ensure that sustainability claims are substantiated by verifiable data. Perhaps something for policymakers to consider as they mull over what SFDR 2.0 will look like could be to require that asset managers align their categorization under SFDR with their compliance with the ESMA Fund Naming Guidelines.

The ESMA Fund Naming Guidelines - which came into effect on May 21, 2025, for existing funds - are intended to help resolve the deficiency in the current regulations by requiring asset managers to demonstrate the alignment of their funds' investments with sustainability terms used in naming and marketing.

Under these requirements - which have been adopted by 25 of the EU or European Economic Area states by the May compliance date6 - asset managers using sustainability terms in their marketing or fund names need to demonstrate that at least 80% of the fund’s investments support the sustainability term used. Additional screens are applied to align with the requirements for Paris-Aligned or Climate Transition Benchmarks under the EU Climate Transition Benchmarks Regulation.

Reversing of the labelling trend?

ICE’s study does not yet account for changes to fund names brought about by the ESMA Fund Naming Guidelines, their categorization and the corresponding effect on the fund NAV. As reported in the March 2025 ICE article on Fund Name Rules, the additional screening requirements under ESMA’s Fund Naming Guidelines result in a significant reduction in the investable universe of assets, which may further exacerbate the effects of increased inflows into assets strengthening their sustainability credentials.

However, ICE has also seen a trend toward removing sustainability terms used in naming and marketing of funds. It is notable that there is no requirement under the Fund Naming Guidelines to align a fund’s naming or marketing with the classification under SFDR. When analyzing the SFDR classification of a fund before and after the sustainability-related term was removed from the name, 20% of the universe of sustainable European funds monitored by ICE removed sustainability terms from the fund name in the last two years. Of those removing sustainability terms, less than 1% downgraded the fund classification (some just from Article 9 to 8); 79 funds (15%) even retained their Article 9 classification.7

Conclusion

The ICE analysis of the impact of SFDR category improvements on NAV growth reveals a significant positive correlation. The study's implications extend beyond individual fund performance, highlighting the potential for sustainability disclosure to drive market effects and reinforce fund performance through a demand-driven mechanism.

As the investment industry continues to evolve, it is essential to address the challenges posed by greenwashing and market distortions. ESMA's Fund Naming Guidelines are a step in the right direction, but the trend toward removing sustainability terms from fund names and marketing materials with no link to the EU SFDR categorization highlights the need for a more nuanced approach to sustainability disclosure.

The ESMA study of fund name changes recently published seems to indicate alignment with our findings regarding the positive impact on NAVs. However, it is not clear at this point whether the introduction of Fund Naming Guidelines will result in additional fund managers removing sustainability terms from fund names - despite the apparent positive NAV impact - because of the associated regulatory obligations. A repeat of such research over the next 12 months will serve to add to the understanding of this trend.