Implementing Sustainable Finance Disclosure Regulation obligations for investment firms
As investors demand greater accountability around environmental, social, and governance (ESG) factors, the EU's Sustainable Finance Disclosure Regulation (SFDR) has put the onus on investment firms to make sustainability disclosures with verifiable data to meet SFDR regulation requirements.
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In brief:
- The introduction of the SFDR regulation in 2021 means that investment firms that make vague ESG claims face serious consequences, including monetary fines.
- The EU regulation has created standardized transparency across all EU financial markets, including product classification and mandatory SFDR Principal Adverse Impact reporting in 2025 to fuel growth in sustainable activities.
- Data collection challenges and classification uncertainties remain the biggest hurdles for SFDR compliance, but technology platforms and automated reporting systems are helping investment firms manage SFDR disclosures and audit requirements.
Since its introduction in 2021, the SFDR regulation has fundamentally transformed how investment firms approach and manage their sustainability commitments. SFDR was designed to redirect capital toward genuinely sustainable activities while combating greenwashing, as Andrew Weir, Global Head of Asset Management and Real Estate for KPMG International explains:
“SFDR is already helping to increase investment flows into sustainable activities in Europe and around the world. It is also creating increased transparency and awareness about sustainable investments, their impact, and their returns.”
SFDR enforcement action
Regulatory authorities in the EU are stepping up scrutiny of financial market participants to ensure they are making verifiable disclosures on investment products for SFDR. This is demonstrated by Luxembourg’s CSSF issuing fines for governance shortcomings in 2024 and France’s AMF conducting spot inspections that revealed no French asset managers audited were in full compliance. These developments underscore the urgency of robust SFDR compliance in 2025.
Sustainable investing trends
But the drive towards sustainable investing isn’t solely due to regulatory pressure. Asset managers have experienced a notable increase in demand for Article 8 and Article 9 funds, with managers in Europe, Middle East, and Africa reporting the highest demand at 91%, demonstrating market appetite for transparent sustainable investment options.
What are the core SFDR requirements for investment firms?
What are SFDR entity-level and product-level disclosures?
SFDR regulations establish a comprehensive sustainability disclosures system operating at two distinct levels. At the entity level, FMIs must publish policies explaining how they integrate sustainability risks into their decision-making processes and document their approach to PAI.
In addition, product-level disclosures follow a three-tier classification system:
- Article 6 products: Traditional investments without specific sustainability considerations
- Article 8 products: Investments promoting environmental or social characteristics
- Article 9 products: Investments with sustainability as their core objective
Articles 8 and 9 products require pre-contractual documentation detailing how they achieve their stated sustainability goals, periodic reporting on outcomes, and demonstration of taxonomy alignment where relevant.
SFDR taxonomy alignment for financial products
Investment firms must also report the percentage of taxonomy-aligned activities within their portfolios, providing investors with quantifiable metrics to assess genuine sustainability impact.
SFDR principal adverse impacts reporting in 2025
The PAI obligation, which applies to financial market participants with more than 500 employees, requires firms to identify and report on 18 indicators, as detailed in the table below, covering multiple ESG factors.
Financial market participants must explain, via these PAI statements, how their investment decisions affect these sustainability factors, creating accountability for real-world impacts.
The European Banking Authority has published an annual report to the Commissions on PAI disclosures under the SFDR which shares some key findings on good and below average practices and lessons learned which investment firms may find useful.
| Greenhouse gas emissions | Total (green house gases) GHG emissions |
| Carbon footprint | |
| GHG intensity of investee companies | |
| Exposure to companies active in the fossil fuel sector | |
| Share of non-renewable energy consumption and production | |
| Energy consumption intensity per high impact climate sector | |
| Biodiversity | Activities negatively affecting biodiversity sensitive areas |
| Water | Emissions to water |
| Waste | Hazardous waste and radioactive waste ratio |
| Social and employee matters | Violations of UN Global Compact principles and Organization for Economic Cooperation and Development (OECD) Guidelines for multinational enterprises |
| Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for multinational enterprises | |
| Unadjusted gender pay gap | |
| Board gender diversity | |
| Exposure to controversial weapons | |
| Environmental | GHG intensity |
| Social | Investee countries subject to social violations |
| Fossil fuels | Exposure to fossil fuels through real estate assets |
| Energy efficiency | Exposure to energy-inefficient real estate assets |
Obstacles in SFDR implementation and solutions
The transition to SFDR-compliance has exposed significant infrastructure weaknesses across the investment industry, most notably raising the question of how to meet SFDR data gaps and quality issues. PAI data availability remains one of the most disputed issues, with multiple branches of portfolio companies needing to contribute to time-demanding data collection processes. Under the first reference period reporting for 2022, this proved especially challenging for SMEs and young companies that lack the personnel and capacity for comprehensive reporting. Data quality varies dramatically across regions and sectors, making reliable comparisons difficult.
- How to understand SFDR classification?
The regulation’s failure to include “transition” investments also creates problems by failing to provide firms seeking to undertake transitions with funding sources, while increasing incentives to lump investments into Article 8 or 9 categories. This ambiguity has led to confusion about proper classification, particularly for products incorporating both traditional and sustainable elements. However, new SFDR categories are under proposal to address this challenge.
The “do no significant harm” principle adds another layer of interpretation challenges, as firms must demonstrate that their investments avoid negative impacts across environmental and social dimensions.
- How much do SFDR compliant systems cost to integrate?
Building SFDR-compliant systems requires substantial investment in technology, training, and process redesign. Smaller firms face particular pressure, lacking the resources larger competitors have. The costs extend beyond initial implementation to ongoing monitoring, reporting, and verification activities.
- What are some effective solutions for SFDR data challenges?
Learning from real-world implementation experiences provides valuable guidance. According to KPMG’s survey of 100 asset managers conducted between July and August 2023, 47% of respondents reported that SFDR has had a positive impact on their firm, with the strongest benefits arising from increased transparency in reporting.
Strategies for SFDR compliance in EU asset management
- Conduct a gap analysis: Perform thorough reviews of current disclosure practices to understand existing actions and project the scope of work ahead, examining how sustainability risks are currently communicated to investors and identifying compliance gaps.
- Establish clear governance: Allocate clear roles and responsibilities for SFDR implementation and address capability or capacity gaps, ensuring fund boards understand their roles through effective governance and reporting structures.
- Develop core policies: Create policies confirming SFDR compliance is being measured and managed comprehensively, including Investment Policies, Stewardship and Engagement Policies, and Escalation and Divestment policies with clear definitions.
- Invest in education: Build understanding of the long-term value case for ESG across the firm, focusing on implications of sustainability and climate risk on portfolios while building consensus on the importance of robust reporting.
- Engage with portfolio companies: Establish systematic data collection protocols with investee companies, providing templates and guidance to standardize submissions.
- Implement vendor collaborations: Partner with specialized data providers to fill gaps in coverage and improve data quality.
- Utilize reporting templates: Adopt standardized templates aligned with EU requirements to ensure consistency and completeness.
Technology’s impact on SFDR adherence
Today, there are many tech tools for SFDR disclosures in investments that contribute significantly towards implementing effective solutions for SFDR data challenges.
Modern compliance increasingly relies on specialized technology solutions. Climate Management and Accounting Platforms (CMAPs) streamline the collection, validation, and reporting of sustainability data across diverse portfolio holdings. These sustainability disclosures systems integrate directly with portfolio companies’ systems, automating much of the manual work that characterized early SFDR efforts.
Advanced platforms offer:
- Automated data collection from multiple sources with validation rules
- Real-time monitoring of PAI indicators across portfolios
- Template-based reporting aligned with regulatory requirements
- Audit trail functionality documenting data sources and calculations
- Scenario analysis tools for testing different classification approaches
Traditional versus digital methods
Manual spreadsheet-based approaches simply cannot scale to meet SFDR’s demands. The volume of data points, frequency of updates, and need for cross-referencing make human-only processes error-prone and inefficient.
Digital solutions transform compliance from a periodic scramble into efficient continuous monitoring. They enable firms to spot emerging issues before reporting deadlines, respond quickly to regulatory clarifications, and demonstrate due diligence through comprehensive documentation.
Audit-ready systems and potential pitfalls
Creating defensible records requires more than collecting data. Systems must capture the provenance of every figure, document methodological choices, and maintain version control as information updates. Audit-ready infrastructure provides regulators with clear sight lines from disclosed figures back through calculations to original source documents.
However, technology alone cannot solve all challenges. That’s because the SFDR’s relatively light external verification through self-assessment systems may result in non-compliance risks. Firms must therefore pair technological capabilities with rigorous internal controls and governance frameworks.
Critical pitfalls to consider:
- Over-reliance on vendor calculations without understanding underlying methodologies
- Inadequate documentation of classification decisions and their rationale
- Failure to update systems as regulations evolve
- Insufficient integration between ESG data platforms and core investment systems
- Neglecting user training that enables personnel to leverage platform capabilities fully
Final thoughts
The SFDR represents a watershed moment in ethical finance, moving the industry from voluntary commitments to mandatory accountability. While implementation challenges persist, the SFDR framework presents a pathway to transparent ESG integration and stakeholder confidence.
Success requires viewing these sustainable finance rules as an opportunity to strengthen investment processes, deepen stakeholder relationships, and contribute to the broader transition toward sustainable economic activity.
By building robust data infrastructure, embracing appropriate technology, and fostering organization-wide commitment to transparent EU ESG reporting, investment firms can meet regulatory obligations while positioning themselves at the forefront of sustainable finance.
Global Relay offers comprehensive data preservation and monitoring features specifically designed for SFDR compliance, creating audit-ready records that withstand regulatory scrutiny while streamlining your disclosure workflows. Explore our compliance solutions for the finance industry to learn how we can support your journey toward transparent, compliant sustainability reporting.