ESG Quick Guide: EU Sustainable Finance Disclosure Regulation (SFDR)

SFDR is in force and has generally applied since 10 March 2021, except for the requirement for large financial market participants to make statements on how their due diligence policies take the principal adverse impacts of their investment decisions on sustainability factors into account (the deadline for which was 30 June 2021) and the provisions relating to disclosures in periodic reports (which applied from 1 January 2022). 

The SFDR Delegated Regulation, which specifies the detailed content and presentation requirements for certain SFDR disclosures, has applied since 1 January 2023.

SFDR is an EU regulation designed to enhance transparency in the financial markets through the standardisation of sustainability-related disclosures, and to improve the comparability of investment products with respect to ESG. 

The disclosure regime sets out entity-level and product-level transparency and disclosure obligations on financial market participants and financial advisers. 

These obligations broadly fall within the following areas:

• Sustainability risks – entity-level and product-level disclosures on the integration of sustainability risks into investment decisions or investment or insurance advice, as the case may be.
• Principal adverse impacts (“PAIs”) on sustainability factors – entity-level and product-level disclosures as to whether and how financial market participants consider the PAIs of their investment decisions on sustainability factors. This disclosure also applies to financial advisers at entity-level.
• Financial products that promote environmental and/or social characteristics (“Article 8”), or which have sustainable investment as their objective (“Article 9”) – Article 8 or Article 9 products are subject to additional disclosure requirements relating to their environmental and/or social characteristics or sustainable investment objective, as the case may be.

The sustainability risks disclosures are mandatory.

The PAI disclosures apply on a “comply or explain” basis, with the exception of entity-level PAI disclosures which are mandatory (i.e. the "comply" mechanism applies mandatorily) for financial market participants with over 500 employees (or parent undertakings of large groups exceeding that threshold on a consolidated basis).

The disclosures for Article 8 and Article 9 products are mandatory.

SFDR applies to "financial market participants" (“FMPs”) and "financial advisers" as defined in Article 2 of the SFDR. These definitions are broad and cover a wide range of regulated entities in the financial services sector.

• “Financial market participants" include AIFMs and UCITS managers, as well as investment firms providing portfolio management. In addition, the term also includes insurance undertakings making available an insurance-based investment product (“IBIP”), institutions for occupational retirement provision (“IORPs”), manufacturers of pension products, pan-European personal pension product (“PEPP”) providers, managers of qualifying venture capital funds and qualifying social entrepreneurship funds and credit institutions providing portfolio management.

• "Financial advisers" include investment firms providing investment advice. In addition, the term includes insurance intermediaries and insurance undertakings providing insurance advice with regard to IBIPs, credit institutions providing investment advice, as well as AIFMs and UCITS managers providing investment advice.

In terms of geographical scope, SFDR generally applies to EU-regulated entities as well as non-EU regulated entities that market products within the EU and/or to EU investors.

SFDR applies to funds and funds-like products (“SFDR Products”). 

Structured products, derivatives and indices/benchmarks are not in and of themselves SFDR Products.

Entity-level disclosures required of FMPs and financial advisers consist of the following:

• Sustainability risk policies (Article 3 SFDR): FMPs must publish information on their websites about their policies on the integration of sustainability risks in their investment decision-making process. Financial advisers must publish equivalent information in relation to their investment or insurance advice.

• Principal adverse impacts (Article 4 SFDR; Articles 4  to 13 SFDR Delegated Regulation): FMPs must publish and maintain on their websites either: (i) where they consider PAIs of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts (the "PAI statement"), taking due account of their size, the nature and scale of their activities and the types of financial products they make available; or (ii) where they do not consider such adverse impacts, clear reasons for why they do not do so, including, where relevant, information as to whether and when they intend to consider such adverse impacts. As noted above, FMPs that exceed the 500-employee threshold are required to publish a PAI statement on a “comply” basis. The PAI statement to be published by FMPs must be prepared using the template set out in Annex I of the SFDR Delegated Regulation and published by 30 June each year, covering the preceding calendar year. Financial advisers must publish equivalent information, except the content requirements of the PAI statement are less prescriptive.

• Remuneration policies (Article 5 SFDR): FMPs and financial advisers must include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks, and must publish that information on their websites.

The extent of product-level disclosures required under SFDR depends on the sustainability profile of the product. All financial products are subject to Articles 6 and 7 SFDR, whereas only certain financial products are subject to Articles 8 to 11:

• Integration of sustainability risks (Article 6 SFDR): Pre-contractual disclosures for all financial products must include a description of: (i) the manner in which sustainability risks are integrated into investment decisions (or, for financial advisers, investment or insurance advice); and (ii) the results of the assessment of the likely impacts of sustainability risks on the returns of the financial product. Where sustainability risks are deemed not relevant, a clear and concise explanation of the reasons must be provided.

• PAI consideration at product-level (Article 7 SFDR): Pre-contractual disclosures must include a clear and reasoned explanation of whether, and if so, how, the financial product considers PAIs on sustainability factors. If the financial product does consider PAIs, the pre-contractual disclosure must include a statement that information on PAIs is available in the product’s periodic report. If the financial product does not consider PAIs, the pre-contractual disclosure must include a statement to that effect and the reasons therefor.

• Financial products promoting environmental or social characteristics (Article 8 SFDR; Articles 14 to 17, 24 to 36 and 50 to 57 SFDR Delegated Regulation): Where a financial product promotes, among other characteristics, environmental or social characteristics (or a combination thereof), provided that the companies in which the investments are made follow good governance practices, pre-contractual disclosures must include information on: (i) how those characteristics are met; and (ii) if an index has been designated as a reference benchmark, whether and how that index is consistent with those characteristics. Where the financial product promotes environmental characteristics, additional disclosures on the degree of taxonomy-alignment of investments are required. In addition to pre-contractual disclosures, Article 8 products are also required to publish website disclosures (Article 10 SFDR) and periodic (annual) disclosures (Article 11 SFDR). The SFDR Delegated Regulation prescribes a mandatory template (Annex II) for pre-contractual disclosures and a mandatory template (Annex IV) for periodic disclosures for Article 8 products, as well as the detailed content requirements for website disclosures.

• Financial products with sustainable investment as their objective (Article 9 SFDR; Articles 18 to 19, 37 to 49 and 58 to 63 SFDR Delegated Regulation): Where a financial product has sustainable investment as its objective, pre-contractual disclosures must include information on how the sustainable investment objective is to be attained, including (where an index has been designated as a reference benchmark) how that index is aligned with the sustainable investment objective and how it differs from a broad market index. Where the financial product has a reduction in carbon emissions as its objective, specific disclosures relating to the Paris Agreement are required. Where the financial product invests in economic activities contributing to an environmental objective, additional disclosures on taxonomy-alignment are required. In addition to pre-contractual disclosures, Article 9 products are also required to publish website disclosures (Article 10 SFDR) and periodic (annual) disclosures (Article 11 SFDR). The SFDR Delegated Regulation prescribes a mandatory template (Annex III) for pre-contractual disclosures and a mandatory template (Annex V) for periodic disclosures for Article 9 products, as well as the detailed content requirements for website disclosures.

SFDR does not prescribe specific product design requirements, minimum investment thresholds or eligible investment targets for Article 8 products. However, the mere integration of sustainability risks (as defined in Article 2(22) SFDR) into investment decisions is not sufficient for Article 8 to apply.

The term "promotion" is interpreted broadly and encompasses direct or indirect claims, information, reporting, disclosures as well as an impression that the financial product considers environmental or social characteristics in terms of its investment policies, goals, targets or objectives. This includes, without limitation, references in pre-contractual and periodic documents, marketing communications, product names or designations, descriptions of investment strategies or asset allocation, adherence to sustainability-related financial product standards or labels and conditions for automatic enrolment.

Financial market participants should only disclose those criteria for the selection of underlying assets that are binding on the investment decision-making process. Criteria that may be ignored or overridden at the financial market participant's discretion should not be presented as characteristics promoted by the financial product, so as not to mislead end investors.

A "sustainable investment" is defined in Article 2(17) SFDR as an investment in an economic activity that contributes to an environmental or social objective, provided that: (i) the investment does not significantly harm any of those objectives (the "do no significant harm" or "DNSH" principle); and (ii) the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.

The SFDR framework does not prescribe specific thresholds or criteria for assessing whether an investment qualifies as a "sustainable investment". FMPs must carry out their own assessment for each investment and disclose their underlying assumptions and methodology. For the purposes of the DNSH assessment, FMPs must take into account the mandatory PAI indicators set out in Table 1 of Annex I of the SFDR Delegated Regulation, and any relevant indicators from Tables 2 and 3 of that Annex.

Where a financial product has sustainable investment as its objective (Article 9 SFDR), all underlying assets must qualify as "sustainable investments" within the meaning of Article 2(17) SFDR.

Member States must ensure that national competent authorities (“NCAs”) designated in accordance with the relevant sectoral legislation monitor the compliance of FMPs and financial advisers with the requirements of SFDR. NCAs must have all the supervisory and investigatory powers necessary for the exercise of their functions.

ESMA and the other European Supervisory Authorities (EBA and EIOPA) (together, the "ESAs") play an important role in promoting supervisory convergence in the application of SFDR, including through:

• Consolidated Q&As: The ESAs and the European Commission publish consolidated questions and answers (Q&As) on SFDR and the SFDR Delegated Regulation, providing guidance on the interpretation and practical application of the rules;

• Common Supervisory Actions (CSAs): ESMA has launched CSAs with NCAs to assess compliance with SFDR and related requirements, including on the integration of sustainability risks and disclosures in the investment management sector. Findings from CSAs are published and inform supervisory expectations across the EU. See our blog post on the findings published by ESMA in July 2025; and

• Annual PAI reports: The ESAs publish annual reports under Article 18 SFDR taking stock of the extent of voluntary PAI disclosures and providing recommendations and examples of good and below average practices to assist FMPs and NCAs. See our blog post on the ESAs’ fourth annual PAI report.

Penalties for non-compliance with SFDR are determined by Member States in accordance with their national law and the relevant sectoral legislation. There is no harmonised EU-wide penalty regime under SFDR itself.

SFDR interacts with a number of other EU sustainable finance legislative instruments, in particular: 

• the Taxonomy Regulation (which establishes the classification system for environmentally sustainable economic activities). Financial products disclosing under Article 8 SFDR that promote environmental characteristics, and financial products disclosing under Article 9 SFDR that invest in economic activities contributing to an environmental objective, are required to include disclosures on the degree to which their investments are in environmentally sustainable economic activities (i.e. "taxonomy-aligned") pursuant to Articles 5 and 6 of the Taxonomy Regulation respectively; 

• the Corporate Sustainability Reporting Directive (“CSRD”) (which requires certain large undertakings and listed companies to report on sustainability matters). CSRD reporting by companies may provide data that FMPs may use for their SFDR disclosures; and

• the MiFID II and IDD frameworks (which require investment firms and insurance distributors to take into account clients' sustainability preferences when providing advice). “Sustainability preferences” may include a minimum proportion of sustainable investments under the SFDR, or the consideration of PAIs on sustainability factors (from a qualitative or quantitative perspective).

On 20 November 2025, the European Commission published a proposal for a set of amendments to overhaul the SFDR (“SFDR 2.0”). The proposals aim to address the shortcomings in the current legislative act by simplifying the rules and align disclosure with other EU sustainability frameworks, thereby increasing efficiency and cutting reporting costs for firms. 

Key changes proposed include: 

• The creation of a new product categorisation regime for financial products making ESG claims, to replace the existing Article 8 and Article 9 disclosure regime. Strict eligibility criteria have been proposed for each of the three new categories - “sustainable”, “transition” and “ESG basics” - to address the concerns EU regulators had with the current disclosure regime being used as a product categorisation / labelling regime (because of which most products can easily claim Article 8 alignment under current rules);
• Strict limitations regarding ESG marketing and disclosures for uncategorised products;
• The removal of portfolio management and investment advice from the scope of SFDR altogether;
• Removing the definition of “sustainable investments”, along with the “do no significant harm” principle and “good governance” requirements (as these principles are now intended to be captured through the mandatory exclusions and other qualifying criteria applicable to each product category);
• Removing the entity-level requirements for PAI reporting and disclosures on how sustainability risks are considered in remuneration policies;
• Streamlining the disclosure and reporting obligations;
• Limiting mandatory Taxonomy-related disclosures to Article 7 (“transition”) and 9 (“sustainable”) products pursuing an environmental objective.

The Commission’s proposal is in the form of a Regulation that will amend the current SFDR. 

The proposal must now be negotiated by the European Parliament and Council under the “ordinary legislative procedure” and so there could be changes to the wording as a result. 

Before the Parliament and Council can commence negotiations (known as “trilogues”), they must first agree their respective negotiating positions. 

The Commission's proposal includes an 18-month implementation period from when SFDR 2.0 comes into effect. The EU legislative process to agree SFDR 2.0 is likely to take around 12–18 months and the 18-month implementation period would then apply on top of that. This means the earliest effective date of SFDR 2.0 is likely to be around early to mid-2028 (at which point, the new Regulation will immediately apply to AIFs and UCITS, whereas there is a 12-month transition period for other financial products). See our blog post for more information.

Current products should continue to comply with the existing SFDR regime. 

Any funds that have their final closing before the effective date of SFDR 2.0 will be grandfathered, albeit there is some uncertainty as to whether the grandfathering will only apply to products that are closed to investors prior to the date of application of the amending Regulation or products which are closed-ended and which have simply been created and distributed before the date of application of the amending Regulation. 

• SFDR

• SFDR Delegated Regulation

• Consolidated SFDR Q&As

• SFDR 2.0 Proposal and FAQ

• SFDR 2.0: What you need to know

• Webinar recording: SFDR 2.0 – Overview of the Commission’s legislative proposal

• Other ESG Quick Guides