The Sustainable Finance Disclosure Regulation (SFDR) aims to increase transparency in the financial market by requiring financial market participants and advisers to disclose sustainability-related information. This regulation is part of the European Union's strategy to direct capital flows towards sustainable investments and to manage sustainability risks more effectively.

SFDR applies to a wide range of financial market participants, including asset managers and financial advisors, operating within the EU. It covers the disclosure of how sustainability risks are integrated into their investment decisions and the consideration of adverse sustainability impacts in their investment processes. The regulation also focuses on providing sustainability-related information about financial products.

The SFDR sets out rules for financial market participants to justify the sustainability claims they make regarding their financial products. It requires disclosures on websites, in prospectuses, and in periodic reports. The disclosures include information on policies for identifying and prioritizing principal adverse sustainability impacts and descriptions of actions taken or planned in relation to these impacts.

The SFDR aims to prevent "greenwashing" by ensuring that financial products marketed as sustainable genuinely meet certain environmental or social criteria. It enhances investors' ability to make informed choices based on reliable, comparable sustainability information, thereby fostering more sustainable investment decisions.

The SFDR mandates disclosures at both entity and product levels. The main provisions (Level 1) of the regulation require entity-level disclosures about policies on the identification and prioritization of principal adverse sustainability impacts. More detailed disclosure requirements (Level 2), including the 'principal adverse sustainability impacts statement', apply to ESG-focused products. These regulations aim to provide clarity and standardization in sustainability-related disclosures.