Since its introduction in 2021, the Sustainable Finance Disclosure Regulation (SFDR) has played a key role in advancing the European Union's sustainability objectives, forming a central pillar of the European Green Deal’s Sustainable Finance Action Plan. Recent assessments by European authorities have revealed gaps in compliance, particularly regarding the more detailed requirements introduced in the SFDR’s Level 2 framework. This article examines the current state of SFDR enforcement, highlights deficiencies identified by regulators and explores the evolving regulatory landscape for sustainable finance in the EU.

This article is written by Leene Timmermann ([email protected]) & Sefa Geçikli ([email protected]). Leene and Sefa are part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Strategy.  

Background

The SFDR came into effect in 2021 and stands as a core pillar of the European Green Deal’s Sustainable Finance Action Plan.  It facilitates transparency and comparability among financial institutions and their financial products by requiring disclosures of relevant sustainability information. The SFDR sets out the framework principles reflecting the key obligations, which is commonly referred to as a ‘Level 1’ Regulation. The SFDR thus contains different delegations to the European Commission to flesh out the technical implementing details in so-called ‘Level 2’ Delegated Acts, based on the advice of the European Supervisory Authorities (‘ESAs’). In this context, the framework for obligations, interpretation, and implementation of the SFDR is structured around three main components:

  • Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (SFDR)
  • Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council regarding regulatory technical standards
  • Consolidated questions and answers (Q&A) by ESAs on the SFDR (Regulation (EU) 2019/2088) and the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288)

Deficiencies in SFDR Disclosures and Stricter Enforcement Signals

The recent report by The Dutch Authority for the Financial Markets (Autoriteit Financiële Markten; AFM) emphasizes its commitment to monitoring SFDR compliance, signals stricter enforcement actions for those falling behind, and marks the beginning of a new phase of supervisory focus on ensuring clear, accurate, and reliable SFDR disclosures.

In our previous article on SFDR, we raised our observation that many financial market participants and financial advisors have based their policies and compliance strategies solely on the Level 1 Regulation, failing to keep up with subsequent regulatory developments (Level 2) and the guidelines of the authorities. 

In line with our observations, The AFM’s assessment of Dutch FMPs (Financial Market Participants) reveals that while most comply with SFDR Level 1 entity and product-level requirements, some continue to fall short. The AFM considers this unacceptable and has, for the first time, contacted individual non-compliant FMPs, signalling its increased enforcement efforts. On the other hand, the AFM notes steady progress in meeting Level 2 requirements but emphasizes that many FMPs still need improvement. Although most FMPs are using the mandated templates, these often lack clarity, preventing investors from fully understanding and comparing the sustainability aspects of financial products. Additionally, some firms fail to publish the required templates on their websites, further hindering market transparency. The AFM urges FMPs to reassess their compliance with Level 2, paying special attention to the quality and precision of their disclosures.

FMPs should be particularly cautious in ensuring that their SFDR disclosures meet key regulatory expectations. This includes verifying that all required templates are being used, and that any missing data for mandatory disclosures is promptly addressed. They must also justify any discrepancies between their SFDR and Taxonomy Regulation (TR) ambitions, particularly when these stem from data availability issues or the taxonomy eligibility of their investments. Additionally, it is crucial to provide a thorough and detailed description of the potential impacts of sustainability risks, incorporating quantitative evidence wherever possible to enhance the reliability and clarity of the disclosures.

Another enforcement signal comes from France, where the French regulator, AMF, assessed five asset managers and found none to be fully compliant with SFDR requirements at both the entity and fund levels. The AMF noted that the disclosures were overly generic and lacked sufficient data, raising concerns about transparency. Additionally, the AMF highlighted the potential risks of greenwashing, underscoring the need for more precise and data-backed sustainability disclosures.

The Future of SFDR

Meanwhile, in a recent opinion, the European Securities and Markets Authority (ESMA) outlined its vision for the future of the EU’s sustainable finance regulatory framework. ESMA proposes phasing out the SFDR's definition of ‘sustainable investments,’ arguing that it gives too much discretion to market participants, undermining comparability and increasing the risk of greenwashing. Instead, ESMA advocates for placing the EU Taxonomy at the core of the framework.

The regulator also points out a key weakness: the current rules focus heavily on sustainable finance but fail to adequately address transition finance, a concept that has gained importance since the SFDR's development. To remedy this, ESMA recommends introducing a legal definition of ‘transition investments,’ citing the European Commission's recent recommendation on financing the transition as a positive model. 

Furthermore, ESMA seeks to expand the framework’s scope, proposing that all financial products under SFDR rules should be required to disclose specific sustainability information, regardless of their stated sustainability ambition.

Forward Thinking

The SFDR has been a critical component of the EU’s effort to promote transparency in sustainable finance, setting the groundwork for greater accountability in the financial sector. While the initial focus on Level 1 compliance provided a foundation for sustainability-related disclosures, the shift toward stricter enforcement signals a new era of regulatory oversight. The challenges highlighted by the Dutch AFM and the French AMF emphasize the need for financial market participants (FMPs) to adapt swiftly to evolving Level 2 requirements. As enforcement intensifies, ensuring clarity, precision, and adherence to mandated templates will be crucial to maintaining investor confidence and mitigating the risks of greenwashing.

Looking ahead, the evolution of the SFDR will likely see more robust integration with the EU Taxonomy and a broader scope to address both sustainable and transition finance. ESMA’s proposals to phase out discretionary definitions of ‘sustainable investments’ and introduce clearer guidelines on transition investments indicate the future direction of regulatory reforms. As the framework matures, FMPs must stay ahead of regulatory changes, enhance their disclosures, and ensure alignment with both SFDR and Taxonomy regulations to support the EU's broader sustainability goals. The coming years are likely to demand greater transparency, data-driven reporting, and continued vigilance in sustainability practices.

RSM is a thought leader in the field of Sustainability and Strategy consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.