Sustainable Finance Regulation Analysis for Fund Managers
- May 22
- 5 min read
Updated: May 23
The transition toward a greener, more sustainable economy has become a top priority for the European Union. At the heart of this effort is the integration of Environmental, Social, and Governance (ESG) principles across financial markets. Reflecting this, the European Securities and Markets Authority (ESMA) has identified ESG disclosures and the fight against greenwashing as Strategic Supervisory Priorities (USSPs). ESMA’s Progress Report on Greenwashing and subsequent Final Report provide a roadmap for strengthening sustainability-related supervision going forward.
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Overview of the Regulatory Landscape
The EU’s regulatory framework for sustainable finance includes several key instruments:
Sustainable Finance Disclosure Regulation i.e. SFDR 1 and SFDR 2.
Taxonomy Regulation (EU) 2020/852, which outlines criteria for determining whether an activity qualifies as environmentally sustainable.
Commission Delegated Regulation (EU) 2021/1255 and Delegated Directive (EU) 2021/1270, requiring UCITS Management Companies and AIFMs to integrate sustainability risks into their governance and risk management frameworks.
In addition, ESMA’s Supervisory Briefing on Sustainability Risks and Disclosures (ESMA 34-45-1427) outlines expectations regarding the inclusion of ESG restrictions in the oversight conducted by a fund’s appointed depositary. Fund Managers are expected to provide their depositaries with sufficient ESG-related data in order to facilitate effective monitoring.
SFDR Disclosure Obligations
The SFDR introduces a multi-layered disclosure regime, with escalating requirements depending on the fund’s ESG profile:
Article 6 Funds: All fund managers must disclose how sustainability risks are integrated into their investment decisions or provide clear justification if deemed irrelevant.
Article 8 Funds: For funds that promote environmental or social characteristics, additional disclosures on ESG promotion are required.
Article 9 Funds: Funds with sustainable investment as a core objective face the most detailed disclosure obligations.
At the manager level, firms must also disclose whether they consider Principal Adverse Impacts (PAIs) on sustainability factors. Where PAIs are considered, detailed statements on due diligence must be published. For Article 8 funds making sustainable investments, and all Article 9 funds, PAI disclosures are mandatory.
Do No Significant Harm (DNSH)
Managers making sustainable investments under Article 8 or 9 must also explain how they apply the DNSH principle, ensuring investments do not cause harm to other ESG objectives. This includes consideration of environmental, social, and governance factors as defined under both SFDR and the Taxonomy Regulation. Though it is noted that most CyIFMs due to their size are not obliged to consider PAIs, CyIFMs do not have to 'opt in' for PAI disclosure and rather they disclose under the 'no PAI consideration' regime in accordance with article 4(1)(b) of the SFDR.
Website Disclosures on PAIs and ESG Integration
Firms are required to maintain clearly labeled sections on their websites addressing how they consider (or do not consider) PAIs in line with SFDR Articles 4 to 10 and Annex I of SFDR Level 2. Accordingly and further to Article 4 of SFDR-2, the Company must publish a separate section of their website titled 'Statement on principle adverse impacts of investment decisions on sustainability factors'. These statements must be:
Comprehensive,
Updated annually by 30 June,
Easy to locate and written in plain language,
Include a summary section of no more than two sides of A4 sized paper when printed.
Additionally, Managers must also provide the following:
Information on one or more additional climate and other environment-related indicators.
Information on one or more additional indicators for social and employee matters, regarding human rights, anti-corruption and anti-bribery matters.
Information on any other indicators used to identify and assess additional principal adverse impacts on a sustainability factor.
Where PAIs are not considered, firms must explicitly state this under a dedicated section titled “No consideration of adverse impacts of investment decisions on sustainability factors.”
Additional Website Requirements for Article 8 & 9 Funds
All funds falling under Article 8 or 9 must publish a dedicated section titled “Sustainability-Related Disclosures” on their website. This must sit alongside fund documents, marketing materials, and investor information.
Under Articles 12 of SFDR and 2(3) of the Level 2 Regulation, these website disclosures must remain up-to-date, reflecting changes in strategy, risks, or fund composition.
Pre-Contractual Disclosures
Under Article 6(1) of the SFDR, managers must include clear statements in pre-contractual documents about:
How sustainability risks are integrated into investment decisions
The expected impact of these risks on fund returns
Reasons for non-integration, if applicable (though CySEC notes that such exclusions are increasingly difficult to justify, especially for Article 8 and 9 funds)
Article 8 Funds
For Article 8 products, pre-contractual documents must:
Detail how environmental or social characteristics are promoted,
Confirm that portfolio companies follow good governance practices,
Include ESG data in the asset allocation section (per Article 16 of SFDR Level 2).
Where the fund promotes environmental characteristics, a statement must be added to clarify that:
‘The “do no significant harm” principle applies only to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities. The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.’
Article 9 Funds
For Article 9 products, disclosures must:
Outline the fund’s sustainable investment objective (e.g. carbon reduction),
Explain methodology for benchmark alignment (if applicable),
Describe how the fund contributes to long-term goals in line with the Paris Agreement,
Include a clear introductory statement at the beginning of the annex, affirming that the product has sustainable investment as its objective.
Periodic Reporting: Demonstrating ESG Impact
For Article 8 funds, periodic reports must outline how well the promoted ESG characteristics were achieved.
For Article 9 funds, these reports must:
Present the sustainability impact using ESG indicators,
Compare performance against any designated benchmark and a broad market index (if applicable),
Be published in accordance with Articles 50 to 67 of SFDR Level 2.
Marketing Communications
When it comes to marketing communication, consistency is key. Marketing materials must always align with disclosed ESG information with no exceptions. Fund managers must ensure that:
All promotional content is fair, clear, and not misleading,
The fund name does not mislead investors by exaggerating ESG integration,
All ESG-related claims are consistent with website, pre-contractual, and periodic disclosures.
Both ESMA and CySEC emphasize that fund names have significant influence on investor perception and must be used responsibly.
Operational Requirements for Fund Managers
Whether or not they manage ESG-labelled funds, all Cypriot AIFMs and UCITS Management Companies must integrate sustainability risks into their operations. This includes:
Updating risk management frameworks to evaluate ESG exposures,
Ensuring compliance teams incorporate sustainability risks in key workflows,
Empowering internal audit to assess adequacy of ESG-related controls,
Ensuring IT infrastructure can support ESG data capture and aggregation,
Establishing internal reporting lines and accountability,
Introducing measurable Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs) for ESG integration.
Additionally, governance frameworks should be enhanced to prevent greenwashing and support long-term sustainability goals.
Final Remarks and Upcoming EU Regulatory Updates
With the European Commission expected to review the SFDR and issue a new proposal in 2025, fund managers should already be assessing how future changes could affect their ESG strategies and disclosure obligations.
CySEC has made it abundantly clear that ESG isn’t a regulatory add-on, it’s a core part of financial supervision. Managers must invest in the resources, training, and culture necessary to be in line with sustainable finance laws at both a holistic and granular level.
Useful links
Written by Andie Henderson, Legal and Compliance Associate, FAI Comply
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