How to overcome three common pitfalls of SFDR reporting: PwC

Nicolas Bourdier

Principal, Deals Sustainability Leader, PwC US

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Neil Hartman

Sustainability Senior Manager, PwC US

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The global sustainability regulatory landscape continues to mature. From California’s climate disclosure laws and state-level Extended Producer Responsibility regulations to the European Union’s Corporate Sustainability Reporting Directive (CSRD), companies are navigating a complex web of disclosure requirements. For financial market participants (FMPs) — including asset managers, private equity firms and others — the Sustainable Finance Disclosure Regulation (SFDR) sits at the center of this web, shaping how FMPs market their funds, establish environmental and social ambitions and disclose annual progress towards fund-level objectives.

SFDR is designed to improve financial market transparency by requiring FMPs to disclose how sustainability factors are integrated into their investment decisions. SFDR classifies funds into three categories to inform investors about the sustainability profile of the financial product: Article 6 - products that do not have a sustainability focus; Article 8 - products which promote environmental and / or social characteristics; and Article 9 - products which have a sustainable investment objective.

Beneath the labels lies a significant undertaking, especially for FMPs with dozens of underlying funds across various asset classes (e.g., credit, real estate and private equity) and geographies. Investors and regulators expect funds to produce credible data and disclosures for their underlying investments. Yet, FMPs continue to struggle, even after multiple SFDR periodic reporting cycles. The European Securities and Markets Authority’s (ESMA’s) supervisory review, published in June 2025, found that 10 of 28 financial market participants filed incorrect or misleading disclosures in 20% or more of their Article 8 and 9 funds¹.

To further complicate matters, the regulation continues to evolve, including the recent ESMA Fund Name Guidelines² which came into effect in May 2025 and dictated certain standards based on fund naming conventions. Additional proposed revisions to SFDR, such as the introduction of a product classification system, establishment of a single sustainability indicator and updated guidance (e.g., criteria to be considered a “sustainable investment”), could be coming later this year, or early 2026³. As such, FMPs should evaluate whether they are deriving a competitive advantage from their SFDR strategy and reporting efforts, and whether there are opportunities to streamline sustainability data collection and reporting processes. This can help avoid the common pitfalls we’ve seen trip up many organizations and transform SFDR reporting from a compliance exercise to a value creation opportunity.

The three common pitfalls of SFDR reporting

FMPs often stumble over the same reporting hurdles. Addressing the following pitfalls head-on can assist in unlocking the value creation opportunity of SFDR:

Overly legalistic disclosures may tick regulatory boxes but diverge from market practices and obscure a fund’s sustainability performance. SFDR filings should be clear, practical and aligned with the fund’s sustainability strategy to credibly communicate progress to limited partners (LPs).

SFDR reporting hinges on cross-functional coordination. Without defined ownership and executive and board oversight, firms can struggle to align distinct investment strategies and integrate process improvements across disparate teams.

Collecting data after the measurement period hinders a firm’s ability to engage with portfolio companies and improve metrics in real time, often resulting in unfavorable disclosures at year-end.

Turning SFDR compliance into a competitive edge

How can companies overcome these missteps? Here are priority actions a firm can make now, ahead of proposed regulatory updates (i.e., “SFDR 2.0”) expected within the next year.

A firm’s overarching sustainability strategy should set the tone for SFDR fund designations. There may be varying goals and practices for individual funds, however, a firm should have consistent approaches and calculations for SFDR related metrics (e.g., sustainability indicators calculations, what it means to “consider” Principal Adverse Impacts). Guiding principles should cover diligence expectations to enable a consistent approach towards reviewing SFDR related metrics and developing a value creation plan which adheres to the sustainability characteristics of the fund.

As we head through the fourth SFDR periodic reporting cycle, organizations should have robust processes and controls for sourcing, aggregating and reporting sustainability and financial data. FMPs should be leveraging digital platforms and AI-driven tools to automate processes and track data throughout the year (where applicable) to reduce manual efforts, build consistency and avoid encountering data surprises beyond the measurement period.

Understanding market practices by strategy and SFDR classification is a critical step for firms looking to launch a new fund or differentiate an existing fund. Rigorous peer analysis helps establish appropriate targets and disclosures, while fostering the fund’s credibility. Done well, benchmarking not only avoids compliance missteps but also shapes a fundraising narrative that stands out in a crowded capital-raising environment.

Initiate conversations today rather than waiting for “SFDR 2.0” to be finalized. Form a view, with executive-level buy-in, about how the firm will respond to proposed changes to the regulation (e.g., what is the preferred categorization of the firm’s financial products? What is the playbook to collect GHG emissions data for portfolio companies which do not track emissions upon acquisition?).

Capturing the value creation opportunities from sustainability

SFDR is maturing, and with that, regulators and investors expect more accurate reporting metrics and clearer, thoughtfully articulated disclosures. Concurrently, organizational sustainability practices are entering a new phase, where investors seek credible links and measurement of value creation stemming from sustainability related initiatives. For FMPs, that reality comes with complexity: reporting on data for dozens of funds, potentially encompassing thousands of underlying investments across distinct strategies and jurisdictions, in an evolving regulatory environment. But it also presents a chance to lead.

Through identifying the value creation opportunities arising from sustainability trends, and approaching SFDR as more than a compliance requirement, firms can embed sustainability data into investment decision making and sharpen the story they tell LPs. Benchmarking fund strategies and characteristics against peers, staying abreast of proposed regulatory updates and leveraging digital platforms and AI-driven tools to streamline reporting are becoming competitive necessities.

The firms that act decisively can not only avoid the pitfalls of weak or inaccurate disclosures. They can also differentiate funds during capital raising, strengthen LP trust and uncover operational insights that create long-term value. SFDR, in short, can be transformed from a reporting burden into a platform for market advantage.

Sources:
_{1. ESMA, 2023-2024 CSA on the integration of sustainability risks and disclosures, June 2025

2. ESMA, Guideline on funds names using ESG or sustainability-related terms, August 2024

3. Joint ESA Opinion, On the assessment of the Sustainable Finance Disclosure Regulation (SFDR), June 2024}