The Limited Effects of Regulating Greenwashing: Evidence from Europe’s SFDR

Over the past decade, sustainable and ESG investing has grown rapidly. At the same time, concerns about greenwashing, the exaggeration of environmental or social benefits of financial products, have increased just as quickly. A growing body of research suggests that many sustainable investments have limited real-world impact, and in some cases may even be counterproductive.

In response, regulators have increasingly turned to disclosure-based regulation. The idea is appealing: rather than restricting investment choices, regulators can require standardized transparency, allowing investors to discipline markets themselves.

One of the most ambitious disclosure regimes to date is the European Union’s Sustainable Finance Disclosure Regulation (SFDR). Introduced in March 2021, SFDR requires mutual funds to classify themselves into three categories: Article 6 funds with no sustainability focus, Article 8 funds that promote environmental or social characteristics, and Article 9 funds that pursue a sustainable investment objective.

In our recent NBER working paper, we study whether SFDR achieved its core objectives. Did the regulation affect investor behavior? Did it lead funds to become more sustainable? And what lessons does it offer for the design of future ESG regulation?

What Must Happen for Disclosure to Matter

For sustainability disclosure to affect real economic outcomes, several steps must occur. First, funds labeled as more sustainable must actually differ in their underlying portfolios. Second, the disclosures must convey new or clearer information to investors. Third, investors must respond by reallocating capital based on that information.

Only if all three steps occur can disclosure-based regulation possibly influence asset prices and, ultimately, firms’ real-world behavior.

Our analysis evaluates each of these channels.

Fund Classifications and Sustainability Measures

Using comprehensive monthly European mutual fund data, we first examine how funds classified themselves when SFDR came into force. At introduction, approximately 7 percent of funds identified as Article 9, 57 percent as Article 8, and the remaining 35 percent as Article 6.

These classifications broadly aligned with existing sustainability metrics. Article 9 funds exhibited lower carbon emissions and higher third-party sustainability ratings than Article 8 funds, which in turn scored better than Article 6 funds. This suggests that the regulation did not generate arbitrary labeling; instead, it largely reflected pre-existing differences across funds.

No Meaningful Effect on Investor Flows

We then examine whether investors responded to the new disclosures. Using a difference-in-differences design around the March 2021 implementation of SFDR, we test whether flows into Article 8 and Article 9 funds changed relative to Article 6 funds.

The results are striking. We find no economically meaningful effect of SFDR on mutual fund flows. Across a wide range of specifications, investors did not reallocate capital toward funds newly labeled as sustainable.

We also analyze later reclassifications, particularly the large wave of downgrades from Article 9 to Article 8 in late 2022, following increased supervisory scrutiny. Once again, investor flows show little response.

Limited Changes in Portfolio Sustainability

If disclosure did not affect investor demand, it might still have influenced fund behavior directly. We therefore examine changes in portfolio-level sustainability measures, including carbon emissions, environmental scores, and carbon risk indicators.

Across all specifications, estimated effects are either statistically insignificant or economically small. Any gradual improvements appear to reflect broader market trends rather than a discrete impact of SFDR.

Why Was the Impact So Limited?

A natural interpretation is that investors simply do not care about sustainability. Our data strongly reject this explanation. Funds marketed as ESG or sustainable consistently attract higher inflows than conventional funds, both before and after SFDR. This is consistent with previous literature.

Instead, our findings point to two related mechanisms.

First, SFDR provided little genuinely new information. Long before the regulation took effect, investors already appeared to know which funds were “light green” and which were “dark green,” based on fund names, mandates, and sustainability ratings. Indeed, before SFDR, the vast majority of funds that would later classify as Article 9 already had explicit sustainability mandates.

Second, the disclosures proved difficult to interpret. In practice, many funds display only their Article 6, 8, or 9 label, with little explanation of what these categories mean. Survey evidence shows substantial confusion among retail investors regarding the distinctions.

Evidence from a Survey and Experiment

To better understand whether the problem lies with investor preferences or with disclosure design, we complement our fund-level analysis with a survey and a controlled experiment.

When investors are shown only the SFDR labels, portfolio choices change very little. However, when the same labels are accompanied by clear and intuitive explanations, investor allocations shift significantly toward more sustainable funds.

These results suggest that investors care about sustainability but struggle to translate complex regulatory classifications into actionable decisions.

Implications for SFDR 2.0

These findings are highly relevant for the ongoing reform of the regulation. The European Commission has explicitly acknowledged that SFDR 1.0 was overly complex and confusing for retail investors.

Proposed reforms would replace Articles 8 and 9 with clearer product categories such as ESG Basics, Transition, and Sustainable. This approach aligns closely with our experimental evidence, which shows that intuitive labeling can materially increase the effectiveness of disclosure.

At the same time, important challenges remain. Much will depend on how thresholds, exclusions, and reporting requirements are implemented. Even well-designed headline categories risk losing effectiveness if complexity re-enters through detailed rules.

Conclusion

Disclosure-based regulation is often viewed as a low-cost response to greenwashing. Our evidence suggests that disclosure can be effective—but only when it provides information that investors can easily understand and use.

The experience of SFDR 1.0 highlights a central lesson for policymakers: transparency is not merely about producing more data. It is about communicating information in a way that meaningfully shapes behavior.

As regulators design the next generation of sustainable finance rules, clarity may matter just as much as ambition.