SFDR Compliance: Avoid Common Mistakes

At the end of 2024, the European Supervisory Authorities (ESAs) conducted research into the compliance efforts of European companies. The purpose was to assess how well sustainability reports align with the Sustainable Finance Disclosure Regulation (SFDR) and to evaluate the quality of the information provided.

As SFDR consultants, we have observed firsthand that the SFDR compliance consulting market is highly fragmented. While many firms follow strong standards and methodologies, we also see reports that are vague, incomplete, or even misleading. Ironically, disclosure obligations designed to enhance transparency and combat greenwashing can sometimes have the opposite effect.

To help you navigate this landscape, this article will breakdown the dos and don’ts of sustainability reporting, highlight the most common mistakes, and provide guidance on ensuring your reports meet both regulatory requirements and best practices as outlined by ESA.

Lack of Clarity or Completeness

The most obvious mistake is failing to clearly state whether you are measuring Principal Adverse Impacts (PAIs), and if so, how and why:

“We measure all mandatory PAIs, as well as two voluntary PAIs: [X] and [Y].”

We have come across reports with vague, ambiguous explanations that leave readers wondering what is actually being measured.

Transparency is key: if you are assessing PAIs, provide a clear methodology; if you are not, explicitly state the reasons why. Ambiguity in this area can lead to confusion, mistrust, and potential non-compliance.

If you measure PAIs

If you have established that you measure PAIs, include the official PAI table with:

                 •               A breakdown of how each PAI indicator has been calculated.

                 •               Key takeaways from the results.

                 •               Historical trends in the data.

                 •               Any challenges in data collection and how they were addressed.

This section should not just present numbers, it should provide meaningful context for the figures and demonstrate that you understand their implications.

According to the ESA, one of the most common mistakes in sustainability reporting is failing to specify what actions have been or will be taken based on the reported PAIs. Listing PAIs without any follow-up actions can make the report appear as a mere compliance exercise rather than a commitment to sustainability.

If you don’t measure PAIs

Not all funds are required to measure PAIs, and there is no need to obscure this fact with ambiguous wording. If you do not measure PAIs, simply state it and explain why. Acceptable reasons include:

                 •               Limited capacity to collect reliable data;

                 •               A determination that measuring PAIs is not proportional to your fund’s size or characteristics; or

                 •               A strategic decision that sustainability is not a priority for your fund.

However, if you surpass the regulatory threshold where PAI disclosure becomes mandatory, or if you claim to be an Article 8+ or 9 fund, then PAI measurement is not optional. In such cases, failing to disclose PAIs correctly can lead to non-compliance.

Can You Use Your Own Framework or Change the Report’s Structure?

A common question we receive is whether companies can apply their own impact measurement framework, modify the structure, or significantly alter the appearance of sustainability reports. The short answer: no, you must adhere to the official PAI indicators and reporting templates.

Why? Well, if every company reported based on their own standards, comparability between reports would be impossible, and the risk of greenwashing would increase significantly. The SFDR framework exists to ensure consistent, transparent, and standardised reporting, so even if certain PAIs don’t seem relevant to your firm, you should still disclose them (unless you rightfully opted-out, of course).

Making substantial changes to the official reporting templates is also strongly discouraged because:

                 •               It reduces readability and comparability between your report and those of other companies.

                 •               It makes it harder for investors and regulators to analyse and compare data.

                 •               It could be seen as an attempt to obscure or misrepresent information.

That said, minor modifications (such as branding elements or formatting adjustments) are generally acceptable as long as they do not alter the structure or content of the required disclosures.

For sustainability-related disclosures that are not tied to a fixed template, you have more flexibility in presentation. However, be cautious about turning your report into a marketing document. Excessive branding, promotional language, or overly stylised formatting can dilute the actual content and divert attention from regulatory disclosures, potentially misleading readers.

Location

Another common mistake is hiding PAI disclosures deep within a website, whether intentionally or unintentionally. Investors and stakeholders should not have to hunt for your sustainability disclosures through multiple layers of navigation, rely on Google searches, or sift through unrelated documents to find the necessary information.

Things to avoid:

·     Burying disclosures in a section that isn’t clearly labeled. We recommend to include an easily identifiable “Sustainability” or “Disclosures” section.

·     Embedding them within unrelated or lengthy documents without clear separation. They should be standalone documents. Ensure they are in a readable and accessible format (e.g., PDF, webpage, or downloadable report).

·     Not providing a search function or clear navigation path to the disclosures.

Conclusion

While this article covers the most frequent mistakes we have seen and the ESA has flagged, the landscape of sustainability reporting continues to evolve. If we identify other problematic practices or areas that need further clarification, we will be back with another post to keep you informed.

If you need more tailored advice, feel free to reach out. We will be happy to help!

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