SFAP thus laid the foundations for the following framework of financial and reporting initiatives:

• European Climate Law

• EU Taxonomy Regulation

• Sustainable Finance Disclosure Regulation

• Corporate Sustainability Reporting Directive

• The EU Climate Transition Benchmark Regulation and the EU Paris-Alignment Benchmark Regulation

• Markets in Financial Instruments Directive II

• EU Green Bonds Standard

European Climate Law – Codifying the Green Deal

In 2019, European countries further internalised the Paris Agreement in what is known as the European Green Deal. The Green Deal translates Treaty obligations into quantitative and measurable goals with the promise of a “just and inclusive” transition. 

Key goals of the European Green Deal:

Short-term: To reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

Long-term: To achieve climate neutrality by 2050. 

Economic growth decoupled from resource use.

Protect, conserve and enhance the Union’s natural capital.

Protect the health and well-being of citizens from environment-related risks and impacts.

Two years later, these ambitions were cemented in the European Climate Law, 2021. 

The EU puts sustainable financing at the heart of the Green Deal, with a plan to invest 1 trillion euros over the period of 2020-2030. The EU Taxonomy & SFDR are pivotal in achieving this investment aspiration.  

A New Age of ‘Taxonomy-Aligned’ Infrastructure

Worldwide, attempts at nature protection are commonly criticised for the lack of clear guidelines around metrics, measurements and standards. Taxonomy Regulation aims to establish a common language and classification system to address this concern, setting strict standards on green investments.

Taxonomy-aligned investments must:

1. Significantly contribute to one of six environmental objectives, namely climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. Source: EU Taxonomy Navigator

2. Do no significant harm to any of the other objectives.

3. Meet minimum social safeguards (e.g. human rights and labor rights).

4. Comply with technical screening criteria that set thresholds for sustainability.

Companies reporting under the CSRD must report on taxonomy-eligibility and taxonomy-alignment. Collectively, the CSRD and EU taxonomy provide safeguards which empower consumers and investors to make trust-based purchasing decisions and avoid being misled by false advertising (‘greenwashing’).

Importantly, the taxonomy does not impose obligations on companies to become greener. Rather, the hope is that companies will want to qualify as “environmentally sustainable” in order to attract investment. Real estate projects, for example, must meet specific criteria, such as energy efficiency standards (e.g. near-zero energy buildings) or renewable energy integration. With mounting market demand for sustainability labels, real estate and infrastructure funds will likely seek out taxonomy-aligned projects to ensure compliance for marketing purposes.

In the longer term, properties and infrastructure that do not meet sustainability standards may see declining values as investors shift capital towards assets that meet SFDR and Taxonomy requirements. Already, capital investments into taxonomy-aligned activities increased between 2023 and 2024 from €191bn to €249bn (EU Taxonomy’s Uptake). 

The Sustainable Finance Disclosure Regulation

The SFDR disclosure rules apply to all EU-based “financial market participants” (FMPs) with over 500 employees. This includes asset managers, insurance companies, pension funds, investment firms, banks offering portfolio management, and venture capital funds (Article 2, SFDR). 

FMPs must report on how environmental, social, and governance (ESG) considerations are factored into their investment decisions and advisory processes. This reporting obligation extends to all asset classes, private equity, and even to non-EU entities marketing funds or products within the EU. Fund managers must also disclose whether and how they consider sustainability risks, such as climate risks, energy efficiency, and social impacts of their investments.

 The SFDR classifies funds into three categories:

• Article 6 funds – do not integrate sustainability risks into their investment decisions.

• Article 8 funds – promote environmental or social characteristics (“light green”). An example of a leading light green fund is LGT Premium Strategy GIM.  

• Article 9 funds – sustainable investment as their core objective (“dark green”). E.g. Handelsbanken Global Index Criteria was a top performing dark green fund in Q4, 2024.  

Although there is conflicting data on the importance of ESG considerations in investment decisions (AIC 2024 ESG Tracker), the regulatory and environmental realities continue to put pressure on the financial system to improve their impact. Accordingly, many funds are aligning with Article 8 or Article 9 to attract investment, meaning they must demonstrate - in line with EU Taxonomy - how their real estate and infrastructure assets contribute to sustainability objectives.

The SFDR and EU taxonomy present enormous reporting challenges for fund managers, especially given the paucity of data available to date. Luckily, as of this year, company data will be more robust and accessible thanks to the Corporate Sustainability Reporting Directive (CSRD). The CSRD requires companies to disclose their ESG risks, impacts and opportunities via standardised reporting data in line with EU Taxonomy. 

Conclusion

The EU Taxonomy and SFDR have significant implications for investments in real estate and infrastructure, especially when these investments are structured through funds. Impact investment strategies, fund management, and reporting are particularly affected.

The collective legal framework imposes an undeniable increase in fund manager workloads. From adopting and investing in ESG reporting tools, data collection, and sustainability assessments to meet SFDR and EU Taxonomy requirements, through to measuring and reporting on the Taxonomy alignment of their assets. However, the rules also enable sustainable funds to achieve a competitive advantage, attracting more institutional capital, benefiting from lower risk premiums and access to green financing instruments such as green bonds.

Further reading: 

• The Corporate Social Responsibility Directive, Explained

• Financing the Green Transition

• MorningStar Review of Article 8 & 9 Performance in 2024

• Current Implementation of SFDR

Abbreviations Unravelled:

SFDR - Sustainable Finance Disclosure Regulation

CSRD - Corporate Social Responsibility Directive

ESG - Environmental, Social & Governance

FMP - Financial Market Participants

SFAP - EU Commission's Action Plan on Sustainable Finance 

COP - UN Conference of Parties