Linking SFDR, CSRD, and the EU Taxonomy

Arun Kelshiker

20 years: Asset management and stewardship

In this video, Arun explores how the SFDR, CSRD, and EU Taxonomy work together to embed sustainability into finance. He explains key concepts like Principal Adverse Impacts (PAIs), how CSRD strengthens SFDR by improving ESG data quality, and the benefits and challenges of implementing these regulations.

Regulation and Initiatives

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Linking SFDR, CSRD, and the EU Taxonomy

11 mins 41 secs

Key learning objectives:

Understand the role of Principal Adverse Impacts (PAIs) in SFDR and their disclosure requirements
Outline how CSRD complements SFDR by broadening the scope of sustainability reporting
Identify the benefits and challenges of implementing SFDR, CSRD, and the EU Taxonomy
Understand the evolving synergy between these regulations in promoting sustainable investment and aligning with EU Green Deal objectives

Overview:

The EU’s Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), and Taxonomy create a cohesive framework for embedding sustainability into finance. SFDR requires fund managers to disclose how they consider Principal Adverse Impacts (PAIs) and align investments with ESG goals. CSRD mandates large companies to report sustainability metrics, complementing SFDR by providing reliable data. While these regulations enhance transparency, standardise ESG disclosures, and promote sustainable investing, challenges remain, including data availability and evolving standards. Together, SFDR, CSRD, and the EU Taxonomy drive Europe’s commitment to the Green Deal, fostering a resilient, sustainable economy where sustainability guides investment decisions.

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Summary

What are Principal Adverse Impacts (PAIs), and why are they significant in SFDR?

Principal Adverse Impacts (PAIs) are key metrics under SFDR that assess how investment decisions negatively influence sustainability factors, covering environmental and social objectives. Fund managers must report on 14 mandatory PAIs, such as carbon emissions and violations of global standards, and select additional metrics relevant to their portfolios. PAIs provide transparency into the real-world impact of investments, enabling stakeholders to make informed ESG-focused decisions and ensuring accountability in the financial sector. Smaller firms with fewer than 500 employees can opt out but must explain their decision.

How does the CSRD enhance SFDR’s effectiveness in promoting sustainable investing?

The Corporate Sustainability Reporting Directive (CSRD) requires large companies to disclose their sustainability practices, providing consistent, high-quality ESG data. This aligns with SFDR’s goal of increasing transparency and enables financial market participants to rely on robust corporate data when evaluating funds and portfolios. By mandating disclosures on areas such as carbon emissions and biodiversity, CSRD ensures that SFDR’s ESG claims are backed by reliable, comparable information, strengthening the framework for sustainable investing.

What are the benefits and challenges of SFDR and CSRD for financial markets?

SFDR and CSRD bring greater transparency, standardisation, and accountability to financial markets, enabling investors to compare products and allocate capital toward sustainable investments. They reduce greenwashing risks and support the EU’s climate goals by channelling funds into taxonomy-aligned activities. However, challenges include limited data availability, particularly for smaller entities, and the complexity of implementing diverse ESG requirements across asset classes. The evolving regulatory landscape demands continuous adaptation, which can strain resources but also drive innovation in sustainability reporting.

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Arun Kelshiker

Arun Kelshiker was formerly the Head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank and part of the bank's Global Investment Committee, where he provided investment advisory and multi-asset portfolio solutions. His focus is now with Cambridge Sustainable Investment Partners, which draws its expertise from the Resilience and Sustainable Development Centre at Cambridge University. He is also a university lecturer at the Frankfurt School of Finance and Management and is Vice Chair of the CFA UK's Inclusion and Diversity Committee and its Investment Committee.

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