Who Needs to Do Annual Disclosures?
- Article 8 funds: Must disclose how they promoted environmental/social characteristics throughout the year.
- Article 8+ funds: Must disclose how environmental and/or social characteristics were promoted during the year. In addition, at least one portfolio company must qualify as making a sustainable investment. For these sustainable holdings, the fund must conduct a Principal Adverse Impact (PAI) assessment and report on how the sustainable investment objective performed.
- Article 9 funds: Must disclose outcomes against their sustainable investment objective, including EU Taxonomy alignment where applicable.
- Article 6 funds are not required to produce these disclosures.
What must be included in annual disclosures?
Requirements that are common to both Article 8+ and 9 funds
- Periodic disclosure template (SFDR standard): Completed annually.
- Key methodologies: How ESG characteristics were promoted or sustainable objectives pursued.
- Results: Outcomes achieved, with both qualitative explanations and quantitative data.
- Website updates: Annual results must be reflected in publicly available disclosures.
- Annex to financial statements: Periodic disclosure must also be attached to fund reports.
- LP distribution: All limited partners must receive the disclosure.
Additional requirements for an article 9 fund annual disclosure
Article 9 funds face stricter reporting obligations:
- Principal Adverse Impacts (PAIs):
- Must report all mandatory indicators.
- Plus at least one additional environmental and one social indicator.
- EU Taxonomy Reporting:
- Must declare whether the fund aligns with the EU Taxonomy.
- If yes, apply technical screening criteria for each portfolio company.
- Classify activities as enabling (supporting sustainable goals) or transitional (helping shift toward sustainability).
These steps require more granular company-level data collection and verification — a challenge for both managers and portfolio companies.
Key challenges fund managers face
- Data Gaps: Portfolio companies may not collect ESG data at the required granularity.
- Consistency: Aligning methodologies with EU templates across diverse holdings.
- Taxonomy Complexity: Interpreting technical criteria for enabling vs transitional activities.
- Time Burden: Pulling data, completing templates, and updating websites/financials is resource-intensive.
- Risk of Greenwashing: Inaccurate or inconsistent disclosures risk reputational and regulatory consequences.
Why do annual disclosures matter for LPs?
- Transparency: Annual disclosures allow LPs to see if the fund delivered on its ESG claims.
- Comparability: Standardized templates let LPs compare funds more easily.
- Trust: Robust disclosure builds confidence, while weak reporting raises red flags.
How to simplify the process
- Standardize ESG KPIs at Onboarding: Agree on 3–5 metrics every portfolio company must report. A side letter specifying this requirement can be added to the termsheet.
- Automate Data Collection: Use digital platforms to gather and validate inputs.
- Centralize Reporting: Link fund-level reporting to SFDR templates automatically.
- Prepare for Audits: Keep a clear trail of methodology, assumptions, and company data.
- Leverage Technology: With platforms like Planicorn, funds can complete annual disclosures in under 30 minutes.
Annual disclosure under SFDR may feel like a burden
But it’s also an opportunity: a way to demonstrate credibility, meet LP expectations, and differentiate your fund from greenwashing competitors.
For Article 8+ and 9 funds, the key is efficiency. With the right process and the right tools compliance can shift from a year-end scramble to a seamless, automated workflow.
Ready to simplify your disclosures? Contact us to see how we help funds automate SFDR reporting in record time.
