Sustainable finance regulation is on the cusp of significant change. As the UK’s Sustainability Disclosure Requirements (SDR) continue to roll out, the EU’s Sustainable Finance Disclosure Regulation (SFDR) faces mounting criticism, with commissioner-designate Maria Luís Albuquerque openly questioning whether it remains fit for purpose.
Financial institutions operating across both regions must now contend with two parallel regulatory regimes that share common goals but differ significantly in structure. As a result, the industry is bracing for regulatory overload, as firms grapple with overlapping reporting obligations, shifting expectations, and diverging compliance frameworks.
SFDR: A framework under pressure
SFDR was designed to channel capital into sustainable investments while increasing transparency and mitigating greenwashing risks. However, almost four years after its introduction, the regulation is widely seen as overly complex and poorly suited to its original purpose.
Instead of offering clarity to investors, SFDR’s Article 8 and Article 9 categories have become de facto labels, despite lacking strict eligibility criteria. This has led to market inconsistency, with asset managers interpreting sustainability disclosures in vastly different ways.
At the same time, sustainable funds are seeing record outflows, partly due to economic conditions but also reflecting investor frustration with SFDR’s lack of transparency and reliability. The European Securities and Markets Authority (ESMA) has urged the European Commission to shift towards a taxonomy-based approach, ensuring that only investments aligned with the EU Taxonomy qualify as sustainable.
However, Albuquerque has yet to clarify whether she supports this direction. In her recent statements, she has prioritised developing a product categorisation system, but key questions remain unanswered—including whether SFDR will be revised, replaced, or restructured entirely.
SDR: A more defined approach?
By contrast, the UK’s SDR introduces clear investment labels, making it easier for investors to understand what they are buying. The four-tiered labelling system includes:
Sustainability Focus – Funds that invest in assets that are environmentally and/or socially sustainable.
Sustainability Improvers – Funds investing in assets that have the potential to improve environmental and/or social sustainability over time i.e. assets on a transition path.
Sustainability Impact – Investments made with the explicit goal of delivering pre-defined, measurable positive environmental or social impact.
Sustainability Mixed Goals – Funds investing in other funds using labels of 2 or more of the above categories.
This approach aligns more closely with market demand for clearer sustainability definitions, particularly for retail investors. The structured framework is also designed to combat greenwashing more effectively than SFDR, which remains principles-based and open to interpretation.
The industry is already engaging with SDR at scale. FE fundinfo’s own data highlights the momentum behind the UK regime, with 964 ISINs now carrying a Consumer-Facing Disclosure (CFD) document, either explicitly labelled under SDR or featuring ESG-related information. This demonstrates a strong push towards transparency and compliance, even as firms work through the complexities of adapting to SDR’s more rigid structure.
Regulatory divergence: A looming challenge
For global asset managers, the divergence between SFDR and SDR presents a serious operational challenge. Firms must navigate two separate frameworks, each with distinct reporting obligations, classification structures, and compliance deadlines.
The regulatory split also complicates cross-border fund distribution. UK-based asset managers marketing funds into the EU must comply with SFDR, even as they adhere to SDR domestically. Meanwhile, EU asset managers seeking UK investors are likely to face the same challenge if the FCA extends SDR to overseas funds, a process that will increase compliance and administration costs.
Looking ahead: Will SFDR follow SDR’s lead?
All eyes are on Brussels. Albuquerque has indicated that SFDR must evolve into a clearer product categorisation system, potentially introducing formal sustainability labels. This would likely be alongside existing ESMA fund naming categories: transition, social or governance; environmental or impact; and sustainability-related terms. However, it remains unclear whether any potential labelling system from SFDR will mirror SDR’s categories or take a different approach.
The European Commission faces a delicate balancing act. Investors want clearer definitions and consistent standards, asset managers require a framework that avoids excessive complexity and cost, and regulators must combat greenwashing without discouraging sustainable investment.
At the same time, political and economic headwinds may delay major reforms. With stagnating EU economic growth and shifting legislative priorities, sustainable finance regulation may not be the Commission’s top priority. While ESMA has called for SFDR revisions by mid-2025, significant overhauls could take years to implement, forcing firms to continue operating under unclear and inconsistent rules.
The bottom line: Strategy over compliance
For financial institutions, the real challenge is not just regulatory compliance—it’s developing a sustainable finance strategy that can withstand shifting regulations. As SDR and SFDR continue to diverge, firms must invest in flexible reporting systems that can adapt to different frameworks, align disclosure processes across multiple jurisdictions to ensure efficiency, and engage with regulators and industry bodies to shape future policy developments.
Ultimately, the industry needs a clear, globally aligned approach to sustainable finance reporting, but that reality remains distant. Until then, firms must prepare for a period of continued uncertainty, regulatory fragmentation, and increasing compliance pressures.
For now, SFDR remains in flux, SDR is gaining traction, and 2025 promises to be a defining year for the future of sustainable finance regulation.
