This paper analyzes the current implementation status of sustainability and taxonomy-aligned
disclosure under the Sustainable Finance Disclosure Regulation (SFDR), which aims to improve the
classification of sustainability credentials of financial products and thereby prevent greenwashing.
Moreover, it considers the development of the SFDR categorization of funds offered via banks in
Germany between September 2022 and March 2023. Examining data provided by WM Gruppe, which
consists of more than 10,000 investment funds and 2,000 index funds, we have observed a significant
proportion of Article 9 (dark green) funds transitioning to the group of Article 8 (light green) funds,
particularly among index funds. As a result of this process, the profile of the SFDR classes has
sharpened, which is reflected in an increased share of sustainable investments in the group of Article 9
funds. When differentiating between environmental and social investments, the share of
environmental investments has increased, but the share of social investments has decreased in the
group of Article 9 funds at the beginning of 2023. The share of taxonomy-aligned investments is very
low, but increases slightly for Article 9 funds. However, as of March 2023, only about 1,000 funds have
reported their sustainability proportions, and this picture may change due to regulatory changes that
will require all funds within the scope of the SFDR to report these proportions in their annual reports
being published after 1 January 2023.

According to recent estimates by the International Renewable Energy Agency (IRENA), meeting the
climate goals of the Paris Climate Agreement, in particular, limiting the mean global temperature
increase to 1.5°C above pre-industrial levels, will require investments of 5.7 trillion USD per year by
2030.¹
In terms of finance, the Parties of the treaty agreed on “making finance flows consistent with a
pathway towards low greenhouse gas emissions and climate-resilient development”².
In light of these ambitious goals, in March 2018, the European Commission presented a Sustainable
Finance Action Plan with a strategy to further link finance and sustainability. This includes a wide range
of new and improved regulations, such as the Sustainable Finance Disclosure Regulation (SFDR)³, which
aims to better classify the sustainability credentials of financial products, the EU Taxonomy, which
defines a list of environmentally sustainable economic activities, and the integration of individual
sustainability preferences under the Markets in Financial Instruments Directive (MiFID II). As shown
by Becker et al. (2022), the introduction of the SFDR and the associated increase in transparency of
sustainability incentivized mutual funds to increase their ESG efforts and thus their ESG scores.
Furthermore, the authors show that the introduction led to positive investment inflows in the Article
8 and Article 9 fund groups relative to less sustainable funds.
At the same time, in response to this new regulatory environment, there has been much public debate
about the accuracy and practicability of the newly implemented legal requirements. Many asset
managers argued that the SFDR lacks a clear definition of sustainability, forcing them to downgrade
their financial products from Article 9 to Article 8.5 This criticism was echoed in the Securities and
Markets Stakeholder Group’s (SMSG) advice to European Securities and Markets Authority (ESMA) on
the European Supervisory Authorities’ Call for Evidence on Greenwashing in January 2023. The SMSG
states the need to clarify important terminology, such as “sustainable investment”, and to further
clarify the scope of Article 8 and Article 9 funds.
6
In response to these requests, the French Financial
Markets Authority (AMF) proposed minimum environmental standards for Article 8 and Article 9
products in February 2023 to reduce greenwashing.
7
This paper sheds light on the current sustainability and taxonomy-aligned investment disclosures
under the SFDR, as well as the evolution of the SFDR categorization of funds offered via banks in
Germany. Based on data collected by WM Gruppe, we examine how more than 10,000 investment funds and 2,000 index funds offered via banks in Germany disclose sustainability matters under the
SFDR between September 2022 and March 2023. We analyze the share of sustainable investments,
including social and environmental investments, as well as taxonomy-aligned investments, and
examine the dynamics between Article 6 (conventional or grey), Article 8 (light green), and Article 9
(dark green) funds between September 2022 and March 2023.

As part of the European Green Deal and the Sustainable Finance Strategy of the EU, the Sustainable
Finance Disclosure Regulation (SFDR) aims to improve transparency in the market for sustainable
investment products and to prevent greenwashing. Greenwashing is the practice of misleading the
public by falsely representing a company or product as being environmentally responsible. In addition
to misleading investors, such practices constitute unfair competition vis-à-vis compliant competitors
and undermine trust in the general green finance market, thereby jeopardizing the ambitious aim to
help tackle climate change.8 To counter this, the SFDR requires from financial market participants and
financial advisers pre-contractual and ongoing disclosures regarding the integration of sustainability
risks and the consideration of adverse sustainability impacts. Due to the different levels of ambition of
sustainable products, the SFDR distinguishes between different product categories:

Article 6 (conventional or grey) products do not have a sustainability scope.
Article 8 (light green) products promote social and/or environmental characteristics, and may
invest in sustainable investments, but do not have sustainable investment as their core
objective.
Article 9 (dark green) products have sustainable investment as their objective.

The SFDR defines sustainable investment as an investment in an economic activity that contributes to
an environmental or social objective that does no significant harm to any other environmental or social objective and on condition that the investee company follows good governance practices.9
Environmental objectives can be measured by key resource efficiency indicators and include the use
of energy, renewable energy, raw materials, water and land, the production of waste, and greenhouse gas emissions, or the impact on biodiversity and the circular economy.10 Social objectives include
tackling inequality or fostering social cohesion, social integration and labor relations, human capital or economically or socially disadvantaged communities.11 Good governance practices aim at sound management structures, employee relations, remuneration of staff and tax compliance.12 The SFDR does not prescribe specific minimum requirements for the contribution to environmental or social objectives. Instead, it leaves the assessment to financial market participants and only requires them to disclose their underlying assumptions.

The SFDR mandates specific pre-contractual disclosures. Under Article 6 SFDR, financial market
participants have to disclose how sustainability risks are integrated into their investment decisions and
financial advisors have to show how they integrate sustainability risks into their investment or
insurance advice. They further have to explain whether and how a financial product considers principal
adverse impacts (PAIs) on sustainability factors, i.e. environmental, social and employee matters,
respect for human rights, anti-corruption and anti-bribery matters.13 Regarding Article 8 products,
financial market participants and financial advisers must disclose how the product meets the promoted
environmental or social characteristics, and if they use an index, how that index is consistent with
these characteristics. For Article 9 products, they must disclose how the objective is to be met with or
without an index. The core disclosure duties on sustainability risks and principal adverse impacts at the
entity-level and on Article 6, 8, and 9 products at a product-level are governed by the SFDR itself (SFDR
level 1) and have applied since 10 March 2021 (see Figure 1).

In addition, the SFDR mandates periodic disclosure in annual reports. Annual reports must show how
Article 8 products meet the envisaged target and, for Article 9 products, their overall sustainabilityrelated impact by means of relevant sustainability indicators or, in the case of an index, by comparison
with the sustainability indicators of a broad market index.14 The periodic disclosure duties have applied
since 1 January 2022.15
As of 1 January 2023, further rules apply to the content, methodology, and presentation of entity- and
product-level disclosures of the SFDR as specified in the Regulatory Technical Standards (RTS) adopted
by the European Commission by way of a Delegated Regulation from April 2022 (SFDR level 2).
16 The
standards require sustainable investments to comply with the “do not significant harm” (DNSH)
principle and specify the content and presentation of the information in relation to this principle. The
RTS and their Annexes also comprise the entity-level principal adverse impact reporting template and
indicators and the mandatory pre-contractual and periodic templates for Article 8 and 9 products.
Regarding periodic disclosures, the implementation of these new rules is mandatory only in the annual
reports issued after 1 January 2023.
For the periodic and pre-contractual disclosures financial products need to report their asset allocation
into sustainable investments, subdivided by social, other environmental, and taxonomy aligned
investments.
17 The RTS define environmentally sustainable investments as a percentage share of all
investments on a market value base.18
While SFDR level 1 and level 2 require Article 9 products to disclose their minimum share of sustainable
investments in pre-contractual documents as well as the actual value in periodic reports, only a subcategory of Article 8 funds must fulfil these requirements. Article 8 products which commit to making
sustainable investments are required to disclose sustainable investments.19 There are multiple names
for this subgroup of Article 8 funds, such as, “Article 8.5”, “Article 8 plus”, or “mid green”.
20
Since 1 January 2022, certain elements of the Taxonomy Regulation21 regarding climate change
mitigation and adaptation have applied to the disclosure obligations set out by the SFDR.22 Article 8
products which promote environmental characteristics need to disclose the alignment with the

Taxonomy Regulation.23 Article 9 products, having sustainable investments as their objective, need to
disclose whether these investments are in activities aligned with the Taxonomy Regulation.24 In 2021,
the European Commission clarified that Article 9 funds can only make sustainable investments.
25 The
RTS clarify that environmentally sustainable economic activities under the SFDR are such economic
activities that comply with the following criteria of the Taxonomy Regulation.
26 The Taxonomy
Regulation provides a classification system (taxonomy) for environmentally sustainable economic
activities and lays down four cumulative criteria for an economic activity to be considered
“environmentally sustainable”:
1) It contributes substantially to one or more defined environmental objectives;
2) it does not significantly harm any of the environmental objectives (DNSH);
3) it complies with a series of minimum social safeguards; and
4) it complies with certain performance thresholds (“technical screening criteria”).
The six environmental objectives defined by the Taxonomy Regulation are climate change mitigation,
climate change adaptation, the sustainable use and protection of water and marine resources, the
transition to a circular economy, pollution prevention and control, the protection and restoration of
biodiversity and ecosystems. The Taxonomy Regulation entered into force on 12 July 2020. Currently,
two Delegated Acts have been adopted regarding the technical screening criteria for eligible activities.
The Climate Delegated Act defines economic activities which can make a substantial contribution to
the first two environmental objectives, climate change mitigation and adaptation.27 It focuses on the
most relevant sectors for climate neutrality, namely energy, manufacturing, transport, and buildings.
The Complementary Climate Delegated Act adds nuclear and gas energy activities.28 On 13 June 2023,
the Commission approved in principle the Environmental Delegated Act that spells out technical
screening criteria for the other four environmental objectives that are not climate-related, i.e.
sustainable use and protection of water and marine resources, the transition to a circular economy,
pollution prevention and control, the protection and restoration of biodiversity and ecosystems.2

n April 2023, the European Commission published further Q&As regarding the SFDR and its
interpretation. It maintains its flexible interpretation of the term “sustainable investments”, does not
prescribe a specific approach for determining the contribution of an investment to environmental or
social characteristics, and thus confirms that it is for the financial market participants to decide
whether investments are “sustainable investments”.30 The Commission states that financial market
participants must disclose the methodology used for this assessment.31
Compliance with the disclosure duties under the SFDR is supervised by national competent authorities.
In the case of funds offered by banks in Germany, i.e., in our data sample, the Federal Financial
Supervisory Authority (BaFin) supervises them. If financial market participants or financial advisers
infringe their duties under the SFDR, BaFin can impose sanctions on them to make them comply,
including administrative penalties. In addition to BaFin’s public law enforcement, failures to comply
with the disclosure duties can lead to damages claims of investors under private law enforcement.32

We rely on a dataset provided by the WM Gruppe, a leading provider of financial information and data,
which contains five date snapshots of a large share of funds offered in Germany.
33 These snapshots
are taken on 21 September 2022, 15 December 2022, 16 January 2023, 15 February 2023, and 15
March 2023. The fund providers deliver their product data to WM Gruppe, which is only responsible
for the distribution. This is a collection of data for financial products, which has to be provided
mandatorily when offering investment products in Germany under the Markets in Financial
Instruments Directive (MiFID II).
34 As of 2 August 2022, entities subject to MiFID II must assess
sustainability risks, factors, and preferences throughout their organizations and operations in order to
prevent mis-selling and “greenwashing” in accordance with the Commission’s Delegated Regulation of
21 April 2021.
35 Specifically, according to Article 1 of this regulation, investment advisers and portfolio
managers need to assess their clients’ sustainability preferences by either asking for a preferred
minimum share of taxonomy investments, a minimum share of sustainable investments (according to
the SFDR), or preferred Principal Adverse Impact factors (PAIs) considered in the investment process.
3

Table 1 shows the coverage of the dataset with respect to the two different fund categories examined
in our paper, as well as their SFDR classification on 15 March 2023. For this date, the dataset contains
a total of 12474 funds.37 Investment funds are the largest fund category with a total number of 10505
funds, followed by the group of index funds comprising 1969 funds. In terms of the SFDR classification,
most funds are categorized as Article 6 funds, closely followed by the group of Article 8 funds (light
green) with a share of 46 %. With a share of around 4 % and a total number of 535 funds, a very small
group of funds is classified as Article 9 (dark green) funds.

The bottom part of Table 1 shows that by 15 March 2023, 1037 (18%) Article 8 funds had already
disclosed an actual share of sustainable investments and 967 (17%) had disclosed the share of
taxonomy aligned investments in their periodic reports. In addition, around 10% of Article 9 funds had
disclosed a proportion of sustainable investments by March 2023, while 47 funds disclosed their share
of taxonomy aligned investments.
Thus, despite the mandatory disclosure requirements since January 2023, only a small share of funds
report on their share of sustainable investments as well as their taxonomy-alignment by March 2023.
This share is expected to increase during 2023 as more annual reports are published under these new
requirements.

The SFDR categorization of funds is not constant over time. Instead, there are dynamics between the
SFDR classes, which are shown in Figure 2 for the largest class of funds, investment funds. The graph
visualizes the flows of funds over time and their dynamics between SFDR classes. The blocks represent
the number of funds observed in a category for each period with the actual number shown next to
them. The lighter shaded areas or lines between the blocks show the transition of funds between time periods, i.e., either staying in one class or moving to another. The width of these areas or lines is
proportional to the number of funds on that transition path. Note that new funds entering will increase
the size of the block, while funds exiting will decrease the size. Considering the width of the blocks, the
group of Article 9 funds is much smaller than the Article 6 and Article 8 classes. This is true over the
whole period. While the majority of funds remains in the same category, some funds change their
classification over time. The most prominent transition paths are given by groups of funds moving from
Article 6 to Article 8, as well as groups of Article 9 funds downgrading to Article 8. While the majority
of upgrades can be observed in the last quarter of 2022, with 97 Article 6 funds upgrading to Article 8
and 6 Article 8 funds upgrading to Article 9, the downgrades mostly occurred in the first quarter of 2022, Here, 66 funds downgraded from Article 9 to Article 8 and only 3 funds downgraded from Article
8 to Article 6. For each time period, more Article 9 funds downgraded to Article 8 funds than funds
moved from other classifications to the Article 9 category. Except in one case, the transitions appear
to be gradual, with Article 6 funds only upgrading to Article 8 funds and Article 8 funds only upgrading
to Article 9 funds, and vice versa.