The Relationship Between SFDR, CSRD, and the EU Taxonomy

 The SFDR (Sustainable Finance Disclosure Regulation), CSRD (Corporate Sustainability Reporting Directive), and the EU Taxonomy are the three main regulatory frameworks guiding sustainability reporting in the European Union. Their overarching goal is not to mandate that all companies become "green," but rather to ensure that green claims are backed by clear, standardised criteria. This framework seeks to eliminate greenwashing by distinguishing between truly sustainable activities and those that are not, allowing consumers, investors, and other stakeholders to make informed decisions.

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The EU Taxonomy

The EU Taxonomy serves as the foundational classification system that determines what qualifies as green and why. Think of it as the"book of truth" that defines sustainability in objective terms. It sets criteria for economic activities that contribute to at least one of six environmental objectives without significantly harming any of the others. Additionally, companies must adhere to minimum social safeguards to be considered sustainable.

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The SFDR

The SFDR applies to financial market participants, such as asset managers and investment firms.The goal is to direct financial flows towards more sustainable solutions by requiring investors to disclose whether, how, and to what extent sustainability considerations influence their investment decisions.

Key aspects of SFDR include:

• Investors must disclose the sustainability impact of their investments.
• Investments can be categorised based on their alignment with the EU Taxonomy.
• Financial entities must clarify whether they invest in sustainable activities or intend to improve the sustainability of their portfolio companies, even if those companies are not currently green.

The fund classification system established in the SFDR persistently references the EU Taxonomy:

• Article 9 (“Dark Green”) Funds must invest in sustainable economic activities. The EU Taxonomy defines what qualifies as a “sustainable” activity based on its Substantial Contribution and Do No Significant Harm (DNSH) criteria as explained above.

• Article 8 (“Light Green”) Funds promote environmental or social characteristics, meaning that they actively work towards making their portfolio more sustainable, again using the EU Taxonomy's criteria as a basis.

Moreover, the SFDR templates require Article 8 and 9 Funds to report what percentage of their investments are aligned with the EU Taxonomy.

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The CSRD

The CSRD applies to companies themselves. Just as businesses must report their financial data annually, the EU now mandates that they also disclose sustainability data, including their EU Taxonomy eligibility and alignment.

The CSRD introduces double materiality, meaning companies must report both:

• How sustainability issues affect their financial performance (financial materiality).

• How their activities impact the environment and society (impact materiality).

Since the EU Taxonomy already assesses environmental sustainability based on strict criteria, companies must rely on it to determine which activities must be disclosed under the CSRD and which measures and targets to set in order to attain 100% alignment. The ESRS, which provide the detailed reporting framework for the CSRD, integrates EU Taxonomy-related disclosures to ensure that sustainability reports align with financial market expectations and regulatory standards.

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Back to the EU Taxonomy

Both the SFDR and the CSRD rely on the EU Taxonomy Regulation's provisions and definitions to set their own requirements. In summary:

• The EU Taxonomy provides the definitions and criteria for what is considered environmentally sustainable.

• ‍SFDR uses the Taxonomy to classify sustainable investments and set reporting obligations for financial market participants.

• CSRD integrates Taxonomy-based sustainability disclosures into corporate ESG reporting.

Together, these regulations create a unified framework for sustainable finance in the EU, ensuring that investors and companies report on sustainability in a consistent, comparable way.

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414 specialises in helping organisations map out this correlation and ensure compliance with the SFDR, the CSRD and the EU Taxonomy.