Understanding the Relationship Between EU Taxonomy, SFDR, and CSRD and Their Impact on Real Estate

Sustainability and ESG are top concerns for forward-thinking investors. However, recent research from the Morgan Stanley Institute for Sustainable Investment found that while 77% of global investors are interested in sustainable investing, concerns about greenwashing are still a top barrier for over 60%.

To reduce greenwashing and create a shared understanding of how sustainability is assessed and disclosed, the EU has created a set of sustainable finance regulations. These regulations define what it means for an asset, fund, or corporation to be environmentally sustainable, increasing transparency and standardising reporting so investors can make informed decisions based on accurate data.

Read on to learn more about these sustainable finance regulations, how they work together, and our best practices to help you meet their criteria and stay compliant.

Understanding the regulations: an overview of EU Taxonomy, SFDR, and CSRD

What do each of these regulations and directives mean for developers and investors? Here’s what you need to know.

EU Taxonomy

EU Taxonomy is a classification system that provides clear, objective criteria you can use to assess whether your assets are sustainable. For real estate, this includes factors such as achieving energy performance targets (based on the type of asset), doing no significant harm to other environmental or social objectives (DNSH), and complying with minimum safeguards.

EU Taxonomy is used on an asset level to assess how individual assets perform against specific targets. Alignment isn’t mandatory, but we’re increasingly seeing it become required by many investors as it delivers a range of benefits: EU Taxonomy-aligned assets are more desirable as they mitigate risks, increase long-term value, and reduce ongoing operational costs.

As ESG considerations become a crucial factor in investment decisions, aligning assets with EU Taxonomy gives you a major advantage. What’s more, an asset that’s EU Taxonomy-aligned is already in a great position when it comes to SFDR and CSRD later on.

Sustainable Finance Disclosure Regulation (SFDR)

The Sustainable Finance Disclosure Regulation (SFDR) is a transparency disclosure that requires financial market participants (FMPs) to disclose sustainability information.

A key objective of this regulation is to prevent greenwashing. FMPs need to clearly outline how their assets align with EU Taxonomy, which helps investors to make informed choices in line with their ESG and sustainability goals and values.

SFDR is reported at a fund level. Funds can be classified as either Article 6, Article 8, or Article 9:

• Article 6: Funds that don’t have a sustainability focus
• Article 8: Funds that promote environmental or social characteristics but don’t have sustainability as their primary focus (light green)
• Article 9: Funds that have a primary focus on sustainability objectives (dark green)

The requirements vary based on which article you’re trying to achieve. For example, to achieve Article 9, 100% of the assets in your fund need to be EU taxonomy-compliant. This means that if you’re trying to attract investors with an Article 9 fund, your assets need to be EU Taxonomy-aligned.

Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) is a disclosure that outlines the requirements companies need to follow when reporting on sustainability.

It operates at an organisational level. Companies subject to the CSRD have to report according to European Sustainability Reporting Standards (ESRS), some of which are -aligned, and face financial implications if they don’t report.

The purpose of the CSRD is to standardise disclosures and improve the quality of reporting. Once again, this helps to prevent greenwashing and provides investors and other stakeholders with transparent, trustworthy information about sustainability initiatives so they can make informed decisions.

How EU Taxonomy, SFDR, and CSRD work together

These three regulations provide a sustainable finance framework that translates sustainability goals into real-world financial incentives.

As sustainability becomes ever more important—to investors, stakeholders, and governments—these increased and standardised disclosure and reporting policies enhance decision-making by providing transparent ESG data, increasing accountability for FMPs and corporations, and reducing greenwashing. To do this, they draw on EU Taxonomy to provide the underlying criteria that needs to be met as part of these disclosures.

3 best practices to comply with these regulations

Whether you’re driven by necessity or choosing to proactively get ahead, here are three ways to become compliant with these sustainable finance regulations.

Get aligned with EU Taxonomy

If you’re looking to maximise the value of your assets or funds, focus on EU Taxonomy alignment.

EU Taxonomy alignment delivers both short-term and long-term benefits, from reducing ongoing costs to safeguarding your asset’s marketability and enabling you to appeal to a wider range of investors. It also provides a solid foundation from which to meet further-evolving regulatory requirements, ensuring that your assets avoid stranding and transition risks and maintain their value.

To begin your EU Taxonomy alignment journey, start by evaluating where you currently stand and outlining what needs to be done to meet the criteria. From there, you can work with experts to create a solid ESG strategy and implementation roadmap that helps you reach your goals.

Use the right reporting software

Streamline disclosures and reporting by using built-for-purpose ESG reporting software like Obi ESG to capture and track key information. Obi ESG simplifies the process with a built-in SFDR reporting tool that lets you input your asset data, automatically calculates the necessary information, and provides you with an SFDR report for your fund.

The right software enables you to centralise all of the information you need, even across complex value chains. It helps you turn your ESG strategy into action by serving as your single source of truth and lets you track, monitor, and export key data for more efficient, accurate SFDR disclosures and reporting.

Implementing these best practices now also means that as requirements change, you can easily access the information you need to demonstrate compliance—such as third-party reports, approvals, and audit trails—giving you greater control and flexibility.  

H3. Work with trusted independent advisors

Working with experts can help you navigate the complexities of EU Taxonomy alignment and required disclosures. From creating your net zero roadmap to capturing all the required data, engaging a full-service consultancy supports your ESG goals and reporting requirements every step of the way.

“Catalyst’s deep technical expertise, and their platform Obi, makes it easy to close out challenging issues,” says Alan O’Brien, Construction Director and Founder for OBA Capital Partners. “Their straightforward advice took the stress out of aligning with EU Taxonomy, and we were left feeling confident about what we needed to achieve.” 

3 benefits of adhering to sustainable finance regulations

In addition to ensuring compliance and maximising long-term appeal, here are three additional benefits of following the sustainable finance framework.

1. Increased transparency

These legislations were designed to reduce greenwashing and increase accountability via clear reporting and disclosures, addressing concerns about a lack of reliable data and helping overcome some of the top-reported barriers to sustainable investment.

2. Improved sustainability performance

Use these regulations to identify how to improve assets in line with sustainability goals to enhance their environmental, operational, and financial performance. Get a concrete, objective understanding of what needs to be done to become compliant and contribute to wider climate goals.

3. Enhanced investor confidence

In-depth disclosures provide investors with accurate, trustworthy data about your asset’s sustainability credentials so they can invest with confidence. Appeal to a broader range of sustainability-focused investors, including those with Article 9 funds.

Capture and centralise high-quality data to meet evolving regulatory requirements

The EU Taxonomy sets criteria for sustainable activities, feeding into SFDR for financial product disclosures and CSRD for corporate sustainability reporting. However, to meet these requirements and demonstrate compliance, you need comprehensive, high-quality data.

Implementing best practices and built-for-purpose ESG software sets you up for success. By collecting, consolidating, and centralising all of your data, you can monitor your ESG performance, make targeted improvements, and streamline reporting and disclosures, empowering you to stay compliant, attract high-value investors, and increase the value of your assets or funds.

Want to learn how Obi ESG can help? Book a demo today