SFDR: ESA’s Fourth Report Highlights Steady Improvements in Disclosure Quality and Accuracy

On 9 September the European Supervisory Authorities (ESA) published their annual report conducted under Article 18 of the Sustainable Finance Disclosure Regulation (SFDR), which legally requires them to deliver an annual report to the European Commission by 10 September each year. When conducting the report, the ESAs focus on:

1. Monitor compliance and assessing the behaviour of FMPs under SFDR as part of EU’s sustainable finance framework.

2. Evaluate both entity-level and product-level disclosures and provide guidance on improving their quality.

3. Provide evidence-based recommendations for potential regulatory improvements to the EU Commission.

4. Supervise the Market and help National Competent Authorities (NCAs) better supervise the quality of sustainability-related disclosures to ensure FMPs disclose information in a “clear, fair and non-misleading manner”.

This year’s report shows that while Principal Adverse Impact (PAI) disclosures have steadily improved in quality and accuracy since the SFDR came into effect in 2021, FMPs still face considerable challenges with data coverage, quantification of actions taken, and the meaningful integration of PAI considerations into investment decision-making processes.

Main Observations and Positive Trends

This year’s report marks an expansion of the coverage to include insurance undertakings and pension product manufacturers alongside fund managers. The review is for the reporting year 2024 and is based on an analysis of 91 entity-level PAI statements, which is a noteworthy increase compared to 65 last year.

The ESAs have conducted their assessment taking into consideration a few key areas and have provided an overall score for each one of them on the scale from 1 to 5, noting the feedback received by NCAs as part of the review process.

• Access to disclosures (3.6/5): The overall ease-of-access to the documents has been improved, with a positive tendency towards more clearly labelled sections on the websites of FMPs on sustainability/ SFDR.

• Comprehensibility (3.7/5): The results show collectively better structured disclosures, though the use of more technical language remains challenging for retail investors.

• Document integrity (3.6/5): In general there have been positive changes towards filling mandatory columns and describing actions taken in all SFDR disclosures.

• Credibility of statements (3.4/5): The report concluded that larger financial groups tend to provide “higher-quality disclosures” with a good documents structure in comparison to disclosures published by smaller or standalone FMPs.

• Quantification of actions (3.2/5): This area proved to be the weakest similarly to previous reporting years with a clear statement by the ESAs that a significant number of disclosures “lacked measurable or clearly defined actions”, which made it practically impossible to evaluate the actual actions taken by FMPs in the respective areas.

• Respecting regulatory deadlines (4.3/5): The analysis showed very high compliance with the 30 June regulatory deadline for publishing PAI Statements according to Article 4 under SFDR.

Persistent Challenges

Going over the same points listed above, the ESAs were able to also outline the challenges and missteps which were observed in SFDR disclosures as part of their 2025 analysis, which can be summarised as:

• Smaller entities appear to be struggling with providing qualitative and consistent information compared to FMPs from larger multinational groups.

• There appears to be a large number of “non-consideration” statements which remain unsatisfactory, with generic explanations about limited resources without forward-looking approaches.

• Data coverage remains low for certain indicators e.g., PAI8 “Emissions to water”, PAI9 “Hazardous waste”, and PAI12 “Gender pay gap”, while for other indicators there was a significant variation in the data coverage among FMPs.

• Another important observation was that in many cases PAIs disclosed as “0” were qualified as “to the best of our knowledge,” making assessment of how relevant these documents are quite difficult.

Additional review of the SFDR Market Trends

If you are interested in finding out more about the how the EU Market is adhering the SFDR in their reporting, we invite you to have a look at the detailed qualitative analyses of more than 45 published PAI statements which was concluded earlier this month by our experts. Our latest Market Study revealed significant inconsistencies in how ESG indicators were calculated and disclosed, which reaffirmed the trend observed in the first market study we carried out in 2023 which showed that methodologies varied widely, and comparability across FMPs was limited.

Conclusions and Proposed Next Steps

In the fourth and final part of their report the ESAs put forward their summarised conclusions along with open suggestions to both the EU Commission and the National Competent Authorities (NCAs) on what actions could be taken to improve the application of the SFDR requirements by FMPs. Their recommendations are focused on simplifying while at the same time strengthening the credibility of the Regulation and include the below points:

To the European Commission:

• Simplification of the PAI statements by reducing the number of indicators included and by promoting the submission of the reports in machine-readable format, so that they are available through the European Single Access Point (ESAP).

• Endorsement of best practices requiring FMPs to clearly distinguish between the proportion of investments coming from actual data and the estimates.

• Reconsideration of the 500-employee threshold with a suggestion to use the total investment amounts instead as a more meaningful measure.

• Reduction in the reporting frequency for the PAI Statement from annual to every 2-3 years which would allow more meaningful analysis executed by the ESAs and the NCAs.

To National Competent Authorities (NCAs):

• Support the improvement of the quality and relevance of disclosures by more actively engaging with FMPs.

• Enhance the communication of supervisory expectations for effective PAI integration into decision-making processes.

• Persist with vigilance when verifying the data coverage, recalling that it should include all investments.

Be prepared for any upcoming changes in the Sustainable Finance Framework

The findings in the report will likely lead to increased supervisory requirements on improving the quality of all disclosures published under SFDR and more specifically the PAI disclosure. By engaging with cleversoft’s reporting services you will gain a trustworthy partner who will support you in increasing your data coverage and streamlining your document review and generation process, to allow you to improve the quality of all your SFDR disclosures.

Get in touch directly and visit our SFDR Service page to learn how we can support your compliance efforts and boost operational efficiency.