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Overview

The SFDR was adopted by the European Parliament and the Council of the EU with the aim of increasing transparency about the sustainability of financial products and strengthening investor protection. Along with the Taxonomy Regulation, the SFDR forms an integral part of the EU Action Plan on Financing Sustainable Growth (COM(2018) 97 final). The Regulation introduces harmonized disclosure rules in the EU on the sustainability of financial products. Hence, the disclosure requirements of the SFDR are closely focused on investment products and services and target the mechanisms for financing a transition to a more sustainable economy.

Scope

The SFDR applies to the following entities:

• financial market participants (e.g., credit institutions or investment firms providing portfolio management) and

• financial advisers (e.g., credit institutions or investment firms providing investment advice)

Disclosure requirements

Entity level:

• Website disclosure on:

  • Policies for integrating sustainability risks in the investment decision‐making process or financial advice (Article 3)

  • Consideration of principal adverse impacts (PAIs)¹ on sustainability factors (Article 4) in the investment decisions or financial advice; comply-or-explain²

  • Integration of sustainability risks in remuneration policies (Article 5)

Product level:

• Precontractual disclosure:

  • Integration of sustainability risks in investment decision/advice, assessment of impacts of sustainability risks on financial returns (Article 6); comply-or-explain

  • For financial market participants that consider PAIs: consideration of the product’s PAIs on sustainability factors (Article 7)

  • For products that promote ‘environmental’ or ‘social’ characteristics (Article 8): information on how the characteristics are met

  • For ‘products with sustainable investment objective’ (Article 9): explanation of how the objective is met

  • Disclosure on alignment with the Taxonomy Regulation for products that promote environmental characteristics (Article 8) or have an environmental objective (Article 9)

• Website disclosure for Article 8 and 9 products (Article 10):

  • Summary

  • Description of the characteristics/objectives and methodologies

  • The information in precontractual disclosures and in periodic reports provided for Article 8 and 9 products

• Information in periodic reports (Article 11):

  • Information regarding the consideration of PAIs on sustainability factors (Article 7)

  • For Article 8 products: information on the extent to which characteristics are met

  • For Article 9 products: overall sustainability-related impact in comparison to any used reference index and a broad market index

  • Disclosure on alignment with the Taxonomy Regulation for products that promote environmental characteristics (Article 8) or have an environmental objective (Article 9)

  •  Utilization of information in management reports/nonfinancial statements (NFRD/CSRD) possible

Moreover, financial market participants and financial advisers need to ensure that there is no contradiction between their marketing communications and their disclosures according to the SFDR (Article 13).

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^{1 PAIs are ‘effects on sustainability factors that are negative, material or likely to be material’.}

^{2 Since 30 June 2021, the comply-or-explain option is no longer applicable for large financial market participants (i.e., with over 500 employees) and those that are parent undertakings of large groups as defined by the Accounting Directive (with over 500 employees on a consolidated basis).}

Regulatory technical standards

In April 2022, the European Commission adopted a delegated regulation on regulatory technical standards (RTS) specifying the details of the content, methodologies and presentation of disclosures (Commission Delegated Regulation (EU) 2022/1288). These standards apply from 1 January 2023 onward.

Another delegated regulation, adopted in October 2022 and applicable from February 2023, stipulates disclosures for the exposure of financial market participants to the fossil gas and nuclear energy sectors as defined by the Taxonomy Regulation (Commission Delegated Regulation (EU) 2023/363). 

However, in 2023, the European Commission called for a review of the regulatory technical standards to broaden the disclosure framework and to address technical issues and a proposal for changes to the regulatory technical standards was provided by European Banking Authority, European Insurance and Occupational Pensions Authority and European Securities and Markets Authority in December 2023.

Links and sources

• EUR-Lex, SFDR

• Hummel, K., Jobst, D., 2024. An Overview of Corporate Sustainability Reporting Legislation in the European Union. Accounting in Europe. DOI: 10.1080/17449480.2024.2312145

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