SFDR and EU Taxonomy
SFDR and the EU Taxonomy Regulation are the two pillars of the EU sustainable finance framework — designed to work together. SFDR requires disclosure of how investments align with the Taxonomy; the Taxonomy defines what alignment means. Understanding the connection is essential for Article 8 and 9 fund managers.
SFDR and the EU Taxonomy Regulation are the two pillars of the EU sustainable finance framework — designed to work together. Article 8 and 9 products must disclose in both pre-contractual and periodic documents: the minimum proportion of investments aligned with the EU Taxonomy; which environmental objectives the aligned investments contribute to; and how the DNSH principle is assessed.
The SFDR-Taxonomy disclosure requirement
Article 8 and 9 products must disclose in both pre-contractual and periodic documents: the minimum proportion of investments aligned with the EU Taxonomy; which environmental objectives the aligned investments contribute to; and how the DNSH principle is assessed.
For Article 9 products: Taxonomy alignment disclosure is particularly important because Taxonomy alignment provides the most rigorous evidence that an investment qualifies as a sustainable investment under SFDR Article 2(17). A fund with high Taxonomy-aligned investment percentage has the strongest evidence for its sustainable investment claims.
For Article 8 products: Taxonomy alignment disclosure is required even where the fund's E/S characteristics do not explicitly reference the Taxonomy. If the minimum Taxonomy-aligned percentage is zero, this must be disclosed — with an explanation of why the fund's strategy does not include Taxonomy-aligned investments.
The 'do not promote Taxonomy-aligned investments' disclosure: funds that cannot or do not measure Taxonomy alignment must include a specific disclosure statement: 'The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.' This statement is mandatory and explicitly draws investor attention to the absence of Taxonomy alignment.
The data problem — why Taxonomy alignment is hard to calculate
Calculating portfolio-level Taxonomy alignment requires knowing each investee company's Taxonomy-aligned revenue, CapEx, and OpEx — the three KPIs that CSRD companies must disclose.
The fundamental problem: until Wave 2 CSRD reporting begins in 2028, most companies in fund portfolios do not publicly report Taxonomy KPIs. Wave 1 CSRD companies (large PIEs, filing from 2025) are the exception — but even Wave 1 disclosures are patchy and inconsistently calculated in early years.
Current practice: most fund managers calculate portfolio Taxonomy alignment using third-party data provider estimates (MSCI, Sustainalytics, Moody's ESG, Bloomberg). These estimates are based on revenue analysis and sector classification — they approximate Taxonomy alignment but do not reflect actual company-reported KPIs.
The result: SFDR Taxonomy alignment percentages disclosed in 2024–2026 are predominantly estimates, not actual company data. Investors should interpret them accordingly.
The CSRD improvement trajectory: as CSRD Wave 1 and Wave 2 companies publish actual Taxonomy KPIs through 2025–2028, fund manager data quality will improve significantly. A fund manager tracking CSRD disclosures can progressively replace estimated Taxonomy data with actual company-reported data — improving disclosure accuracy and reducing greenwashing risk.
Taxonomy alignment and the sustainable investment definition
A key question for Article 9 fund managers is the relationship between EU Taxonomy alignment and the SFDR sustainable investment definition.
Are Taxonomy-aligned investments automatically sustainable investments? Not precisely — Taxonomy alignment satisfies the 'contributes to an environmental objective' criterion of the Article 2(17) sustainable investment test, but the DNSH and governance criteria must still be separately assessed. An investment in a Taxonomy-aligned activity that simultaneously violates UNGC principles fails the governance test and cannot qualify as a sustainable investment.
Are sustainable investments always Taxonomy-aligned? No — the Taxonomy covers specific activities in specific sectors. Many credible sustainable investments (education, healthcare, certain social infrastructure) are not covered by Taxonomy TSC and cannot claim Taxonomy alignment even if they make a positive environmental or social contribution.
Best practice for Article 9 funds: disclose Taxonomy-aligned investments as a subset of total sustainable investments. The Taxonomy-aligned proportion is the most rigorously verified component; the broader sustainable investment percentage covers additional investments meeting Article 2(17) criteria through other means.
Frequently asked questions
Must Article 9 funds invest only in Taxonomy-aligned activities?
No — Article 9 requires sustainable investments, not exclusively Taxonomy-aligned investments. Taxonomy alignment is one route to demonstrating sustainable investment status; investments can also qualify as sustainable investments through other means (social objectives, transition activities not yet covered by TSC). Taxonomy-aligned investments are a subset of sustainable investments.
What percentage of Taxonomy alignment is typical for Article 9 funds?
Early SFDR periodic disclosures (2023–2025) show most Article 9 funds with Taxonomy-aligned percentages of 5–20% — reflecting the limited Taxonomy coverage and data availability. As TSC coverage expands and CSRD investee data matures, Taxonomy-aligned percentages are expected to increase. Compare against peer funds in the same strategy rather than against an absolute benchmark.
Does our Taxonomy alignment calculation need to be assured?
SFDR does not mandate assurance of Taxonomy alignment disclosures. However, as part of CSRD limited assurance (for fund managers subject to CSRD), the sustainability disclosures including SFDR-related information may be within the assurance scope. Expect regulatory pressure for increased assurance of SFDR disclosures as the framework matures.