The objective of the EU Disclosure Regulation, formally known as the Sustainable Finance Disclosure Regulation (SFDR, Regulation (EU) 2019/2088), is to channel capital flows toward sustainable investments and economic activities. This regulation primarily aims to enhance transparency for investors regarding sustainability matters. It is rooted in the European Commission’s 2018 “Financing Sustainable Growth” action plan.

The SFDR establishes explicit transparency requirements for financial market participants and financial advisors, encompassing both entity-level and product-level disclosure obligations.

Among the entity-level disclosure obligations, Article 4 SFDR is particularly significant as it addresses the Principle Adverse Impacts (PAI) Statement. This provision mandates financial market participants to disclose on their websites whether they consider the principal adverse effects of investment decisions on sustainability factors. If they do, they must provide details such as their carbon footprint. Conversely, if they do not take these impacts into account, they are required to explain their reasoning under the “comply or explain” approach.

Regarding product-level disclosure obligations, financial market participants must furnish information on how sustainability risks are integrated into their investment decisions for each financial product subject to the SFDR (Article 6 SFDR). Additional disclosure requirements apply when a financial product is marketed with environmental and/or social characteristics (Article 8 SFDR) or when a financial product is explicitly designed as a sustainable investment (Article 9 SFDR). Providers of such financial products must primarily disclose the attainment of sustainability goals in their periodic reports (Article 11 SFDR). Furthermore, they are obligated to publish and regularly update the information in accordance with Articles 8, 9, and 11 SFDR on their websites (Article 10 SFDR). Article 15 SFDR contains specific provisions applicable to occupational pension schemes and insurance intermediaries, permitting them to disclose information through alternative means.

BaFin, the German financial supervisory authority, ensures that financial market participants and financial advisors under its jurisdiction adhere to the obligations outlined in the SFDR.

Technical Regulatory Standards for SFDR

The obligations under the SFDR are further detailed in a Delegated Regulation (Regulation (EU) 2022/12888), which lays down the Regulatory Technical Standards (RTS) specifying the disclosure requirements outlined in Articles 4, 7, 8, 9, 10, and 11 SFDR. The Delegated Regulation’s Annexes II to V include standardized templates for product-related disclosures, which financial market participants must use when reporting on financial products falling under Articles 8 or 9 of the SFDR. Additionally, the entity-level disclosure obligation under Article 4 SFDR, which pertains to the PAI Statement, is detailed in Annex I of the Delegated Regulation.

Interaction with the Taxonomy Regulation

Since January 1, 2022, the product-related disclosure requirements of the SFDR have been supplemented by Articles 5 to 7 of the Taxonomy Regulation (see also EU Taxonomy Regulation). Financial products marketed with environmental characteristics or designed to contribute to achieving an environmental objective as defined in Article 2(17) SFDR must disclose a taxonomy-aligned percentage. This percentage reflects the proportion of environmentally sustainable investments (as defined under Article 2(1) of the Taxonomy Regulation) in relation to the total investments within the financial product.