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Unlocking ESG Potential Through SFDR: Navigating an Evolving Regulatory Environment

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Service level
CFCL
Last Updated
30.06.2025

Article provided by Deloitte Tax & Consulting, SARL.

Summary

The revised SFDR aims to enhance legal clarity, reduce greenwashing risks and improve the comparability of sustainable products, benefiting asset managers, fund distributors, and CSDs by offering consistent rules and reducing compliance burdens. Streamlined disclosures will aid smaller asset managers, while alignment with other EU frameworks will reduce regulatory fragmentation. However, the revision must address legal ambiguities, data challenges, complexity and enforcement limitations to avoid increased compliance costs and ensure market effectiveness.

Timeline

  • March 2021: SFDR enters into application.
  • July 2022 – February 2023: Development of technical standards and publication of delegated acts.
  • September – December 2023: Public and targeted consultations by the EU commission.
  • May 2024: Publication of the summary report of consultation responses.
  • December 2024: Proposal for a new product categorisation by the Platform on Sustainable Finance.
  • 2 May 2025: Launch of the EU Commission’s Call for Evidence.
  • 30 May 2025: Deadline to submit feedback to the Call for Evidence.
  • Q4 2025: Expected publication of the revised SFDR.

Expected benefits

Greater legal clarity: The revised SFDR aims to clarify vague or inconsistently interpreted concepts (e.g. “sustainable investment”), reducing ambiguity and legal risk. Asset managers and fund distributors will benefit from more consistent rules for classifying and marketing ESG products, while CSDs will gain clarity in their role supporting settlement and recordkeeping of compliant instruments.        

Reduced risk of greenwashing: Objective criteria for ESG product categorisation will help ensure marketing claims are substantiated. This supports asset managers and distributors in avoiding reputational damage and regulatory penalties, while enhancing trust for end-investors.

Improved comparability of sustainable products: A harmonised EU-wide product categorisation system will enable investors to more easily compare financial products on sustainability grounds, fostering informed decision-making.  Fund distributors can use this framework to enhance client guidance, while CSDs may need to adjust systems to reflect new classifications in product metadata.

Streamlined reporting obligations: Simplified disclosures and a focus on key indicators will reduce compliance burdens, particularly for smaller asset managers and distributors, enabling them to focus resources more efficiently.

Better alignment with other EU frameworks: The revised SFDR will be designed to work in synergy with the EU Taxonomy and the Corporate Sustainability Reporting Directive, reducing overlaps and regulatory fragmentation.

Enhanced investor confidence in ESG-labelled products: Clearer standards and improved data quality will make ESG-labelled products more credible. Distributors will find it easier to match products with client preferences, while CSDs will see increased demand for transparency and traceability in post-trade services.

Key areas for attention

Despite the promising objectives of the SFDR revision, several critical areas require close attention to ensure the new framework is effective, coherent, and does not create unintended consequences for market participants or investors.

Legal uncertainty and conceptual ambiguity: The SFDR has been criticized for its lack of clear definitions for key concepts such as “environmental or social characteristics.” This ambiguity has led to inconsistent interpretations among financial market participants, increasing the risk of greenwashing and undermining investor confidence. Of 98% of funds available for sale in the EU, regulatory complexities and uncertainties are one of the most common reasons preventing the creation of impact strategies in private market funds.[1]

Misuse of SFDR as a labelling regime: Article 8 and 9 classifications have been adopted by the market as de facto labels for ESG products. This unintended use has led to confusion and misrepresentation of products’ sustainability credentials. The European Supervisory Authorities have recommended replacing these articles with clearer categories such as “sustainable” and “transition” to better reflect the products' objectives. Resultingly, in Q1 2025, 262 funds relabelled their products (a 628% increase compared to Q1 2024).[2]

Data availability and quality challenges: Gaps in ESG data, especially for PAI indicators, continue to challenge asset managers in meeting reporting requirements. Misalignment with CSRD timelines affects the reliability of downstream data used by distributors and CSDs, increasing reliance on estimates.

Complexity and usability issues: The SFDR’s disclosure requirements are often seen as overly complex and not user-friendly, especially for retail investors. The current templates and documentation can be difficult to navigate, potentially hindering investors’ ability to make informed decisions and increasing the administrative burden on asset managers.

Inconsistencies with other EU regulations: There are notable overlaps and inconsistencies between the SFDR and other EU sustainable finance regulations, such as the CSRD and the EU Taxonomy. These discrepancies can lead to redundant reporting requirements and confusion among stakeholders, highlighting the need for better alignment and integration across the regulatory framework.

Regulatory enforcement and oversight limitations: National Competent Authorities have reported limited enforcement actions against greenwashing due to resource constraints and challenges in accessing quality data. This situation risks disadvantaging compliant asset managers and distorting competitive fairness across the market.

Potential for increased compliance costs: The implementation and ongoing compliance with SFDR requirements have led to significant costs for FMPs, particularly in terms of data acquisition and reporting. There is concern that the revision could further increase these costs, especially if new requirements are introduced without adequate consideration of their impact on smaller fund managers and distributors.


References[1] Morningstar Direct. Data as of March 2025. Based on SFDR data collected from prospectuses on 98% of funds available for sale in the EU, excluding money market funds, funds of funds, and feeder funds.[2] Morningstar Direct. Data as of March 2025. Based on 1,096 Article 8 funds that have added, dropped, or changed ESG- and sustainability-related terms in the legal names since 2022. Excluding money market funds, funds of funds, and feeder funds.