The SFDR (Sustainable Finance Disclosure Regulation) is Regulation (EU) 2019/2088. It requires financial market participants and financial advisers operating in the European Union to disclose, in a harmonised way, how they integrate sustainability risks and what negative impacts their investment decisions have.
Its aim is twofold: to give the end investor transparency and to curb greenwashing in financial products marketed as "green" or "sustainable". It has applied since 10 March 2021, and its detailed technical standards (the RTS) since January 2023. This guide covers who it binds, how it classifies products, what PAIs are, and how it connects with the EU taxonomy and the CSRD.
What the SFDR is and why it exists
Before the SFDR, every asset manager described its sustainable funds with its own criteria, which made comparison impossible. The regulation creates a common disclosure language: it requires information at two levels, the entity (the manager or adviser) and the product (each fund or mandate). The logic is that capital can only flow into the transition if investors genuinely understand what sits behind each label.
The SFDR is part of the sustainable finance plan under the European Green Deal, alongside the taxonomy and corporate reporting rules. It is designed to link the information companies publish with the decisions of those who finance them.
Who it applies to
The SFDR targets two broad groups:
- Financial market participants: fund managers, alternative fund managers, insurers offering investment products, investment firms managing portfolios, and pension and venture capital fund managers.
- Financial advisers: firms providing investment or insurance advice.
It does not bind companies in the real economy directly, but its effect reaches them: to classify and disclose their products, funds ask for environmental data from the companies they invest in, including the carbon footprint and scope 3 emissions.
Product classification: articles 6, 8 and 9
The practical core of the SFDR is how it classifies products by their sustainability ambition, known by the articles of the regulation that govern it.
| Category | What it is | Common name |
|---|---|---|
| Article 6 | A product that neither promotes sustainability characteristics nor has a sustainable objective. It must state how (or why not) it integrates sustainability risks. | "Grey" product |
| Article 8 | A product that promotes environmental or social characteristics, provided investee companies follow good governance practices. | "Light green" product |
| Article 9 | A product with a measurable sustainable investment objective (for example, cutting emissions or contributing to an environmental goal). | "Dark green" product |
A common mistake is to treat articles 8 and 9 as official "labels" or quality seals. They are not: they are disclosure categories. An article 9 fund is not "better" by decree; it takes on stricter transparency duties and must prove it meets its sustainable objective.
PAIs: principal adverse impacts
The PAIs (Principal Adverse Impacts) are the negative effects investment decisions can have on sustainability factors: greenhouse gas emissions, the portfolio's carbon footprint, exposure to fossil fuels, water use, hazardous waste, the gender pay gap, or breaches of the UN Global Compact principles, among others.
The SFDR sets a mandatory set of PAI indicators that large managers must publish and explain how they consider. For investors, PAIs look at a portfolio's "dark side": not only the good it does, but the harm it may be financing. Socially responsible investment increasingly relies on this data to screen and prioritise.
Link with the taxonomy, the CSRD and the Green Asset Ratio
The SFDR does not work alone. It leans on other parts of the EU framework:
- The EU taxonomy defines which economic activities count as environmentally sustainable. The SFDR requires disclosing what share of a product is taxonomy-aligned.
- The CSRD requires companies to report sustainability data under the ESRS. That data is the raw material funds need to comply with the SFDR, and double materiality connects both worlds.
- The Green Asset Ratio (GAR) measures how much of a bank's assets finance taxonomy-aligned activities; it shares logic and data sources with the SFDR.
If you want to go deeper into how it all fits together, see our guide to the EU green taxonomy.
The state of the SFDR review in 2026
The SFDR was designed as a disclosure regime, but in practice the market began using articles 8 and 9 as product labels, which was never their purpose. That is why the European Commission opened a review.
On 20 November 2025 the Commission published its reform proposal, informally called SFDR 2.0. It would replace the article 8 and 9 regime with a system of formal product categories (a "Sustainable" category, a "Transition" category and an "ESG Basics" category), each subject to a minimum 70% portfolio threshold and common exclusions, while simplifying and shortening disclosures. The proposal would also remove the obligation to publish entity-level PAIs.
It is important to understand that, as of mid-2026, this is still a proposal under negotiation. On 24 June 2026 the EU Council published its negotiating mandate for SFDR 2.0, but the final text must still be agreed in trilogue between the Commission, Council and Parliament. Until it is adopted, the current articles 6, 8 and 9 regime stays in force. It is worth tracking, because it will change how sustainable financial products are classified and marketed in Europe.
Frequently asked questions
Does the SFDR apply to companies that are not financial entities?
Not directly. The SFDR binds managers and advisers. But to classify their products and calculate PAIs, those entities request sustainability data from the companies they invest in, so the indirect effect on the real economy is very real.
Is an article 9 fund always more sustainable than an article 8 one?
Not necessarily. The articles are disclosure categories, not a quality ranking. An article 9 fund takes on a sustainable investment objective and stricter transparency duties, but real quality depends on how it delivers and on the data behind it.
What is the difference between the SFDR and the EU taxonomy?
The taxonomy defines which activities are sustainable; the SFDR requires disclosing how a product integrates sustainability and what share is taxonomy-aligned. They are complementary: one sets the definitions, the other the transparency rules.
Reliable sustainability data to meet the SFDR
For a fund to classify its products or calculate PAIs, it needs traceable environmental data from the companies in its portfolio. With Manglai your company measures and certifies its carbon footprint, scope 3 included, and generates the information investors and lenders will ask for under the sustainable finance framework.
