A guide to the EU Sustainable Finance Disclosures Regulation for Funds and Fund Management Companies


The three categories of SFDR compliance

On 10 March 2021, the Sustainable Finance Disclosures Regulation (SFDR Level 1) imposed a raft of new sustainability assessment and disclosure obligations on UCITS managers and AIFMs (including internally managed UCITS and AIFs) (Managers). These obligations fall into one of three core categories:

Sustainability Risk
SFDR Level 1 requires Managers to assess the potential for environmental, social and governance (ESG) factors to negatively impact the returns of funds under management and disclose the outcome of that assessment to investors both in the funds’ prospectus documents and on the Manager’s website.

Sustainability Impact
SFDR Level 1 requires Managers, on a comply-or-explain basis, to assess and make website disclosure of the negative or adverse impacts of funds’ investments on ESG factors.

Sustainable Fund
(Light/Dark Green Funds)
Funds marketed as having an environmental or social element to their investment strategy (Light Green Funds) or which specifically target environmental or social investments (Dark Green Funds) are subject to enhanced prospectus, periodic and website disclosure requirements under SFDR Level 1.


Level 2 for two of three categories

Sustainability Impact & Sustainable Funds
In addition to the SFDR Level 1 principles based rules (Section 1. above), Managers will shortly be subject to detailed technical standards which prescriptively mandate the form of compliance with the SFDR Level 1 Sustainability Impact and Sustainable Fund rules (Level 2 Rules). The Level 2 Rules are scheduled to come into effect from 1 January 2022. The Level 2 Rules for Sustainability Impact and a significant portion of those for Sustainable Funds were adopted by the European Supervisory Authorities (ESAs) in February 2021 and are shortly expected to be finalised by the Commission and published with an effective date of 1 January 2022. The remaining Sustainable Fund Level 2 Rules (relating to Taxonomy compliance) were under consultation until 12 May 2021 and, despite remaining subject to adoption by the ESAs, are also slated to come into effect on 1 January 2022.  For ease, any reference in this briefing to the Level 2 Rules includes both the February (ESA-adopted) standards and the later, as yet to be adopted by the ESAs, Taxonomy-related standards.

Sustainability Risk
There are no Level 2 Rules for Sustainability Risk, however, additional Sustainability Risk related requirements, in the form of UCITS and AIFMD regime amendments, were adopted by the Commission on 21 April 2021 and are scheduled to apply from October 2022, following their transposition into Irish law. The UCITS and AIFMD amendments will require Managers to adapt their existing due diligence and governance arrangements for the assessment and consideration of Sustainability Risk. 


Sustainability Impact Disclosures

With effect from 10 March 2021, Managers are required to assess and publish qualitative website disclosure of the negative or adverse impacts of funds’ investments on the environment, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters (Sustainability Impacts). This SFDR Level 1 requirement applies on a comply-or-explain basis for Managers with 500 employees or less. Managers with more than 500 employees can opt to explain non-compliance until 30 June 2021 but must comply thereafter, i.e. such Managers lose the ability to explain non-compliance from that date. From 1 January 2022, the Level 2 Rules (which likewise apply on a comply-or-explain basis for Managers with ≤ 500 employees) mandate the form of assessment of adverse Sustainability Impacts and require enhanced qualitative, along with quantitative, disclosures of the outcome of that assessment by 30 June each year.

Sustainability Impact Disclosures Template

The Level 2 Rules mandate the use of a prescriptive template for disclosing Sustainability Impacts. The template, referred to as a principal adverse Sustainability Impacts statement (PAI Statement), contains five sections. The enhanced qualitative disclosure requirements under Level 2 Rules are set out in Sections 1, 3, 4 and 5 and quantitative disclosures are contained in Section 2 of the template PAI Statement:


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