SFDR for fund managers: what sustainability disclosures investment firms must make

This article is for informational purposes only and does not constitute legal advice. Consult a qualified legal professional for advice specific to your situation.

What SFDR requires and why it sits in this series

The Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088, CELEX: 32019R2088) is the EU’s framework for sustainability-related disclosures in financial services. It requires fund managers and other financial market participants to classify their products by sustainability characteristics and disclose, in structured formats, how those characteristics are achieved and maintained.

SFDR sits at the intersection of financial regulation and sustainability regulation. For fund managers, it is primarily a financial services obligation: it is enforced by national financial supervisors, its disclosure templates are prescribed by the European Supervisory Authorities, and its classification decisions affect how products are marketed to investors. But its substance is sustainability. The sustainability risks embedded in their portfolios, the adverse impacts their investments cause, the environmental or social characteristics their products promote: these are the same subject matter that CSRD, CSDDD, and the EU Taxonomy address for the companies those funds invest in.

This creates a practical dependency. A fund manager trying to satisfy SFDR’s disclosure obligations needs sustainability data from the companies in its portfolio. As CSRD rolls out and the quality of corporate sustainability reporting improves, that data becomes more available. In the meantime, fund managers are working with estimates, third-party data providers, and partial disclosures. Understanding where SFDR sits within the broader EU sustainability regulatory landscape is essential context for fund managers building their compliance infrastructure.

For a map of that landscape, see EU sustainability regulation in 2026: an overview of what is now in force. For a detailed treatment of SFDR as a financial regulation, covering its history, legislative context, and regulatory monitoring implications, see SFDR explained: sustainable finance disclosure for fund managers.

This article focuses on what SFDR requires in practice: the disclosure obligations at entity and product level, how the classification system works operationally, and where fund managers encounter the most significant compliance difficulties.

Who is in scope

SFDR applies to financial market participants and financial advisers operating in the EU. For fund managers, the relevant categories are alternative investment fund managers authorised under AIFMD and UCITS management companies. Investment firms providing portfolio management services are also in scope.

The regulation applies to EU-based firms and to non-EU firms marketing products to EU investors. A fund manager domiciled outside the EU that raises capital from EU institutional investors through a Luxembourg or Irish feeder vehicle is in scope for the products it markets into the EU. The disclosure obligations follow the product and its distribution into the EU market, not the domicile of the manager.

The proposed SFDR 2.0 revision, published by the European Commission in November 2025, would remove financial advisers and portfolio managers from scope. That change is not yet in force and is subject to the EU legislative process. Until it applies, the current scope provisions remain binding.

The two levels of disclosure obligation

SFDR operates at two levels simultaneously. Understanding both is necessary because they impose different obligations on different parts of the firm’s operations, and because compliance at one level does not substitute for compliance at the other.

Entity-level disclosures

Every firm in scope must publish disclosures at the entity level, covering how sustainability risk is integrated into its investment decision-making processes. Sustainability risk is defined in the regulation as the risk that an environmental, social, or governance event or condition could cause a material negative impact on the value of an investment.

The entity-level disclosure on sustainability risk integration must explain the firm’s approach in general terms: how sustainability risks are identified, how they are assessed, and how they feed into investment decisions. It must be published on the firm’s website and kept up to date.

Firms above 500 employees face an additional entity-level obligation: publication of a principal adverse impacts statement, covering how the firm’s investment decisions affect sustainability factors across its entire portfolio. This obligation is discussed in more detail below.

Firms below the 500-employee threshold are not required to publish a PAI statement but must explain on their website whether they consider PAIs and, if not, why. The comply-or-explain structure means that the threshold exempts smaller firms from the full reporting burden but not from the need to address the question.

Product-level disclosures

Every financial product managed or marketed by an in-scope firm must be classified under one of three categories and must carry structured disclosures corresponding to that classification. The disclosures must appear in pre-contractual documents, on the firm’s website, and in periodic reports.

The classification decision is the starting point. What must be disclosed, in what format, and with what level of detail all follow from it.

The classification system in practice

The regulation establishes three categories, referred to by the article numbers of the regulation in which they appear. The terms light green and dark green are widely used in the market for Article 8 and Article 9 respectively, but neither phrase appears in the legislation.

Article 6: no sustainability focus

Article 6 is the baseline. It applies to products that do not integrate sustainability into their investment strategy and do not promote environmental or social characteristics.

Article 6 does not mean the product is exempt from SFDR. It means the product must disclose how it manages sustainability risk, or explain why sustainability risk is not relevant to its strategy. The comply-or-explain structure is explicit in the regulation: a manager cannot simply omit sustainability risk from its Article 6 product disclosures. It must either describe how it manages the risk or make the case that the risk does not apply.

In practice, Article 6 is the appropriate classification for strategies where sustainability integration is structurally incompatible with the investment approach, or where the manager has made a deliberate decision not to incorporate ESG factors. It is not a default category for products where the manager simply has not thought about sustainability, and treating it as such creates regulatory and reputational risk.

Article 8 applies to products that promote, among other characteristics, environmental or social characteristics, or a combination of both, provided the companies in which investments are made follow good governance practices.

The word promote is central to Article 8 and has been interpreted broadly by regulators and in Commission guidance. A fund that applies negative screens to exclude certain sectors, incorporates ESG ratings into its investment process, or maintains a stewardship programme with sustainability objectives may qualify as promoting environmental or social characteristics. The promotion does not need to be the sole or primary objective of the fund. It needs to be a genuine feature of the investment strategy, reflected in how the portfolio is constructed and managed.

Article 8 is the most common classification. A significant majority of EU assets under management sit in Article 8 products, which reflects how broadly the promotion threshold has been interpreted and applied.

Within Article 8 there is an important operational distinction. Some Article 8 funds commit to a defined proportion of sustainable investments, as defined under Article 2(17) of the regulation. Those funds must apply the do no significant harm principle and the good governance test to the designated sustainable investment proportion. Article 8 funds without a committed sustainable investment proportion have more flexibility: they must promote the stated characteristics, but they are not required to ensure that every investment satisfies DNSH.

This distinction matters for portfolio construction, data requirements, and disclosure. A fund that commits to 30 percent sustainable investments needs to be able to demonstrate that those investments meet the DNSH test across all six environmental objectives under the EU Taxonomy and against social objectives. That requires data about investee companies that is not always readily available, particularly for investments in smaller companies or companies outside the EU that are not yet subject to CSRD.

Article 9: sustainable investment as the objective

Article 9 applies to funds that have sustainable investment as their objective. This is a higher standard than promotion. The fund’s investment objective must be sustainability, and every investment must be assessed for compliance with the sustainable investment definition: contribution to an environmental or social objective, no significant harm to any other objective, good governance.

The DNSH and good governance requirements apply across the entire Article 9 portfolio, not just a designated proportion. This is the most operationally demanding aspect of Article 9 classification. A fund with a genuine climate transition objective must nonetheless assess every portfolio holding, including those held for reasons of risk management or liquidity, for DNSH compliance across environmental and social objectives.

Article 9 funds must also select a reference benchmark aligned with the sustainable investment objective, or explain why no such benchmark exists and how the portfolio construction achieves the objective in its absence. A broad market index does not satisfy this requirement.

The operational demands of Article 9 contributed to a significant wave of reclassifications from Article 9 to Article 8 in early 2023, when the Level 2 disclosure requirements came into force and fund managers reassessed whether their portfolios could sustain full DNSH compliance across all holdings. Managers considering Article 9 classification need to work through the DNSH assessment requirement in detail before making the classification decision.

Principal adverse impacts

Principal adverse impacts are the negative effects of investment decisions on sustainability factors. SFDR requires in-scope firms above 500 employees to publish an annual statement at the entity level covering the mandatory PAI indicators.

The Regulatory Technical Standards classify PAI indicators into three tables. Table 1 contains the mandatory indicators: greenhouse gas emissions including Scope 1, 2, and 3 of investee companies, carbon footprint, exposure to fossil fuel activities, energy consumption intensity, biodiversity-sensitive area exposure, water emissions, hazardous waste generation, board gender diversity at investee companies, and the gender pay gap, among others. Tables 2 and 3 contain additional indicators that firms may choose to report on a voluntary basis.

At the product level, the obligation depends on classification. Article 9 funds must consider PAIs as part of the DNSH assessment that applies to all investments. Article 8 funds that commit to a sustainable investment proportion must apply DNSH to that proportion, which requires PAI-level data. Article 8 funds without a committed sustainable investment proportion may choose whether to report PAIs. Article 6 funds are not required to consider PAIs.

The practical challenge is data. PAI reporting requires Scope 3 emissions data, board diversity figures, and other indicators from investee companies, many of which do not yet publish these figures in a consistent or reliable format. Fund managers relying on third-party ESG data providers face estimation uncertainty that is difficult to quantify and disclose accurately. As CSRD expands the population of companies required to report this data, the quality of PAI reporting will improve. In the near term, fund managers should be transparent about estimation methodologies and data gaps rather than presenting PAI figures with false precision.

The EU Taxonomy intersection

The EU Taxonomy Regulation establishes a classification system for environmentally sustainable economic activities. Its interaction with SFDR is significant and creates one of the most operationally complex disclosure requirements fund managers face.

Article 8 and Article 9 funds must disclose the proportion of their investments that are in Taxonomy-aligned economic activities. For Article 9 funds with an environmental objective, Taxonomy alignment is directly relevant to demonstrating that the sustainable investment objective is being met. For Article 8 funds, the Taxonomy alignment disclosure is mandatory but the regulation does not prescribe a minimum proportion.

Taxonomy alignment data is difficult to collect accurately because it depends on corporate disclosures that are still rolling out. Under CSRD as amended by Omnibus I, only companies exceeding both 1,000 employees and €450 million in net turnover are required to report, meaning the population of mandatory reporters is significantly smaller than originally planned. The largest companies began reporting in 2025, but the second and third waves of companies that were originally due to follow from 2026 and 2027 are now out of scope from financial years starting on or after 1 January 2027. Non-EU companies are not required to report at all.

For fund managers investing in smaller EU companies or in non-EU companies, Taxonomy-aligned revenue data is often unavailable or must be estimated. The standard practice is to disclose the proportion of the portfolio for which data is available, state the methodology used for the remainder, and be explicit about the limitation. Regulators have accepted this approach during the transition period, but expectations around data quality are rising.

For a full explanation of the Taxonomy and its classification logic, see The EU Taxonomy explained: what it is and why it affects more than just financial firms.

Common compliance failures

Several patterns of non-compliance appear consistently in regulatory feedback, supervisory statements, and enforcement actions across member states.

Classifying products as Article 8 on the basis of exclusionary screens alone, without any affirmative promotion of environmental or social characteristics, is a widespread error. Exclusions reduce exposure to activities the manager wishes to avoid, but they do not by themselves constitute promotion of positive sustainability characteristics. ESMA has been explicit that the promoted characteristics must be pursued actively, not merely implied by what the portfolio avoids.

Making Article 9 classification decisions without working through the DNSH requirement across the full portfolio is a more serious error. A fund that classifies as Article 9 based on its investment objective, without assessing whether every holding satisfies DNSH across all six environmental objectives and against social criteria, is misclassified. The consequences are regulatory, reputational, and potentially civil.

Treating SFDR disclosures as static documents updated once at product launch is a compliance failure that national supervisors are increasingly identifying. SFDR requires that disclosures remain accurate and up to date. A fund whose investment strategy has evolved, whose Taxonomy alignment data has changed, or whose PAI figures have shifted materially must update its disclosures to reflect current reality.

Inconsistency between pre-contractual disclosures, website disclosures, and periodic reports is a common finding in supervisory reviews. The three disclosure channels must be consistent. Where they are not, the inconsistency itself becomes evidence of inadequate compliance processes.

What SFDR 2.0 changes

The European Commission published its proposal to revise SFDR in November 2025. The proposal replaces the Article 6, 8, and 9 classification system with three new categories: Sustainable, Transition, and ESG Collection (referred to in some commentary as ESG Basics).

Each category requires a minimum proportion of the portfolio to meet defined criteria. The Sustainable category requires at least 70 percent of investments to be in activities that contribute to an environmental or social objective without causing significant harm. The Transition category requires at least 70 percent of investments to be in activities on a credible path to environmental sustainability. The ESG Collection category requires 70 percent of investments to meet minimum ESG standards defined by reference to the EU Taxonomy and PAI indicators.

Mandatory exclusions apply across all three categories, covering activities that are incompatible with the category’s sustainability objectives. The specific exclusions differ by category.

The proposal simplifies disclosure templates, replacing the current Annex templates with two-page standardised documents. Entity-level PAI disclosures are removed, addressing the overlap with CSRD. Product-level PAI disclosures are retained for the Sustainable and Transition categories.

The concept of sustainable investments under Article 2(17) and the current DNSH and good governance test as standalone requirements would be replaced by the new threshold and exclusion framework. This removes much of the definitional complexity that has generated compliance difficulties, but it introduces new threshold requirements that may be demanding for funds currently classified as Article 8 without a committed sustainable investment proportion.

The proposal is subject to the EU legislative process. The Commission’s timeline points to an application date of approximately 2028. Current obligations remain fully in force until the new framework applies.

Fund managers should monitor the legislative process carefully. Changes made during European Parliament and Council review may alter the proposal significantly before adoption. The classification migration from current Article 6, 8, and 9 to the new categories will require a systematic review of every product’s investment strategy, portfolio composition, and disclosure documentation. That review is easier to plan when the final text is known, but the groundwork of understanding current portfolio sustainability characteristics in depth can begin now.

The interaction with CSRD

SFDR and CSRD address different parties but create mutual dependencies. SFDR addresses fund managers and requires them to disclose sustainability data about their portfolios and the companies they invest in. CSRD addresses large companies and requires them to disclose sustainability data about their own operations and value chains.

The dependency runs in one direction: SFDR compliance depends on CSRD data. A fund manager trying to report PAIs, assess Taxonomy alignment, or demonstrate DNSH compliance for Article 9 holdings needs sustainability data from investee companies. CSRD is the mechanism that makes that data available at scale.

As CSRD reporting matures and the quality of corporate sustainability reporting improves, SFDR compliance will become less dependent on estimation and third-party proxies. Given the narrower mandatory reporter population under Omnibus I, that improvement will be gradual. For the foreseeable future, fund managers should expect to work with imperfect data, disclose methodology transparently, and update their processes as better data becomes available.

For a full explanation of CSRD and its disclosure requirements, see CSRD and ESRS explained: what the corporate sustainability reporting directive requires.

Verdandi monitors SFDR, the EU Taxonomy, and CSRD continuously, so fund managers working through sustainability disclosure obligations are working from current requirements as the SFDR 2.0 legislative process develops and CSRD data availability improves. Start for free.