SFDR

What it means

SFDR is the EU Sustainable Finance Disclosure Regulation. It requires fund managers, insurers offering investment products and financial advisers to disclose how they take sustainability risks into account and how their investments adversely affect the environment and society.

The regulation divides products by ambition: ordinary products, products promoting environmental or social characteristics, and products with a sustainable investment objective. In practice they are referred to by the regulation's articles as Article 6, 8 and 9 funds, with Article 9 funds facing the strictest requirements.

SFDR is closely linked to the EU taxonomy, which defines environmentally sustainable activities, and to corporate reporting under the CSRD. Fund managers use the data companies disclose to assess their investments.

How it works in practice

For investors, a fund's classification is a guide when choosing a mutual fund or unit-linked insurance. Products with higher ambitions must explain in pre-contractual and periodic reports how they achieve and measure their objectives.

Financial advisers must ask clients about their sustainability preferences and offer products that match. Clients thus learn whether and how their money contributes to environmental or social goals.

For companies raising money from investors, SFDR means growing demands for ESG data. Funds need information from companies on emissions, diversity or governance in order to meet their own obligations.

What to watch out for

An Article 8 or 9 label is not a seal of quality. These are disclosure categories, not certification, and funds in the same category differ widely. Investors should read what a particular fund actually does.

Overstating products' sustainability is a form of greenwashing that supervisors watch closely. The SFDR rules are also being reviewed and amended, so the current position and supervisory guidance must be followed.