KEY ESG software helps Fund Managers with SFDR compliance

Case study - How will the new SFDR guidelines affect your company?



    Mid-Market PE Fund

    Main Achievement

    Main achievement

    SFDR Compliance

    Key ESG Platform

    KEY ESG Platform

    Company and Fund Manager

Achieve SFDR Article 8 Compliance for your Private Equity Fund: A Case Study

Since 2020, Environmental, Social, and Governance (ESG) regulations and sustainable finance initiatives have been rapidly evolving. The Sustainable Finance Disclosures Regulation (SFDR) represents the next phase in its evolution, and our case study reveals the optimal approach for handling these changes.

From June 2023, Financial Market Participants (FMPs) will have to disclose the sustainability-related performance of their market funds to EU investors. This occurs at both Asset Manager and Fund levels, with 2022 levels being used as a point of reference. These reporting obligations apply to all private equity funds investing in companies that are publicly listed and operating in Europe. This includes venture capital, growth equity, private equity, and other funds.

Anticipating this decision, many key industry players decided to get ahead of the game. These firms elected to adopt and develop these measures sooner rather than later.

They consistently recorded their 2022 ESG performance across 9 specific environmental indicators and 5 relevant social SFDR core indicators. They established their competitive advantage. And they left many of their competitors wondering how they had managed to gather the required data to achieve compliance. Many wondered how they would manage to maintain these efforts over time.

We've put together this article to shed light on the new regulations and show businesses and private equities how best to prepare. We’ll run you through the key terms and how they’ll impact your business. We’ll then use our case study to show you the perfect way to approach these issues - through collaboration.


What is SFDR?

The SFDR stands for Sustainable Finance Disclosures Regulation. It is the legal requirement that privately held companies report on their efforts to demonstrate sustainability. The first phase came into effect on 10th March 2021. It required asset managers to categorize their ESG funds as either Article 8 or Article 9 funds. Article 8 funds promote environmental or social characteristics, whereas Article 9 funds have environmental or social objectives. Other funds are categorized as Article 6. The European Commission have published a Q&A document to help managers categorize their funds.

Phase two was initially delayed, but it begins in July 2022. At this point asset managers will need to prove their reasoning by evidencing their categorizations.

Prior to these requirements, companies adopted several voluntary metrics to showcase their action towards sustainable investment. These included reports by the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), the Carbon Disclosure Project (CDP), and the Sustainability Accounting Standards Board (SASB). While these standards were valid in their own ways, each was orientated towards a different set plan. Their metrics did not align with each other and, as such, the data produced was not comparable. If companies follow up on insights arising from forced comparisons, this can often have an adverse impact.

For many European investors, these regulatory bodies provided additional metrics for them to include and consider alongside key factors influencing their investment decision. SFDR measures align these alternative metrics, making them standardized and comparable. They will allow General Partners to better assess their sustainability risk and make the right decisions for their business portfolio.

How do these new regulations impact businesses and private equity portfolios?

There are many benefits to investing in a sustainable company or a sustainable product or service. And there are many reasons why people are interested in these initiatives. Most of these concerns stem from environmental considerations, such as the desire to combat climate change and be an ethical investor. However, investors also need to ensure that they generate strong financial returns for themselves. Finding the balance can prove to be tricky.

As sustainable investing has become more popular, more companies have started reporting on their sustainability efforts. If a company is interested in attracting sustainable investors, it has an incentive to report on its sustainability efforts with full transparency. With the new guidelines, all companies operating within the EU must report on these metrics. Reporting must be done regardless of whether or not sustainability is one of their key considerations.

How will new SFDR guidance change things?

The new SFDR measures will impact all FMPs and financial advisors working within the EU. All parties will be required to disclose information on the sustainability of their investments, and the information disclosed must be coherent and comparable. This is to prevent greenwashing and enable ESG metric comparisons to remain transparent in their approach to financial market sustainability.

From reducing greenhouse-gas emissions, to supporting sustainable production and combatting climate change, the new reporting obligations cover many topics. And all of these should be disclosed to investors.

"Sustainable investment", however, refers to both the environmental impact of an investment, and also its social implications. This means that, even if your portfolio has little or no environmental impact, you may still be required to disclose information.

For many financial advisors, FMPs, and private equity professionals, these new regulations have been a source of anxiety. Thankfully, the ESG experts at KEY ESG are here to help ease the transition.


Case Study: How private equity funds can prepare for SFDR Article 8 reporting

We were recently approached by the Investor Relations Partner at a Europe based mid-market private equity fund. The team reached out for help on how KEY ESG could help the fund take action to achieve SFDR Article 8 compliance.

The objective was simple. As a multi-country and multi-asset General Partner, the fund wanted to meet SFDR Article 8 compliance criteria across its entire portfolio of companies. The team needed an efficient method of systematizing and automating these processes. This needed to be something that would be easy to maintain over time. 


Why do General Partners need help with SFDR compliance?

The fund faced numerous organizational and technical challenges, preventing it from confidently preparing for the SFDR Article 8 compliance.

  • Limited ESG expertise meant that data and knowledge gaps were becoming evident. Portfolio companies and deal teams had limited knowledge of ESG metrics and methodologies. This meant that datasets were often incomplete or incomparable, making it difficult to get a clear view of the fund's overall performance.
  • ESG management wasn't continuous. Data collection occurred once a year because it was such a difficult and time-consuming task. This made it hard for teams to effectively manage their targets and take more sustainable options into account.
  • Processes were neither replicable nor scalable. Management teams were having to reinvent the wheel on ESG policies and processes. Without an internal platform to share data on, there was no guidance to promote what best practice should be. This made it hard for management to establish a plan for how to move forward in the future.

KEY ESG's Solution

KEY ESG's intuitive software facilitated the fund's compliance with SFDR Article 8 regulatory requirements.

Both the General Partner and their portfolio companies used KEY ESG's intuitive software solution to streamline their processes and minimise risk. The Fund Manager Platform was used by the General Partner. Information was fed back into this from the Company Platform used by the portfolio companies.

The Fund Manager solution enabled our General Partner to invite each portfolio company to join KEY ESG. They were then asked to upload the required data with regard to 14 core SFDR metrics (so called Principal Adverse Impact or PAIs). These metrics tracked their progress and allowed the General Partner to make comparisons between different companies.

The Company Platform allowed multi-user and multi-site data to be uploaded for each core SFDR metric. This provided portfolio companies with a clear path towards collecting all the required pieces of information needed to enable them to reach compliance.

KEY ESG best practices and tools enabled this success:

  • KEY ESG’s Customer Success Team were invaluable. They successfully helped the portfolio company management teams to get onboard with KEY ESG platforms and become familiar with the software.
  • KEY ESG’s intuitive approach made it easy for teams to incorporate the software into their regular business practices. Integration was seamless. The teams have now adopted KEY ESG as their single source of truth for the General Partner and management teams to manage ESG performance.

What success looks like for general partners?

  • Less time spent on ESG, and more positive ESG outcomes. With KEY ESG intuitive software, General Partners save valuable organizational time on data gathering. Simultaneously, they also learn about ESG and how to improve ESG management processes.
  • Smoother SFDR compliance. KEY ESG allows the General Partner's portfolio companies to comply with rules on SFDR disclosure more quickly.
  • Ownership of the ESG narrative. Adopting KEY ESG as the single source of truth for ESG performance provides access to reliable and consistent ESG insights. These are fed back to the individual companies and the overall fund strategy.
  • More scalable and replicable processes. Using the KEY ESG software suite enables General Partners to systematize and streamline ESG processes across their portfolios. This allows them to create recurring reporting rounds without having to reinvent the wheel each time.

What's next?

As EU regulators strive to create more sustainable practices for businesses, ESG metrics and new regulations become more difficult to keep track of. For individual firms, this can be difficult. For private equity firms overseeing large and varied portfolios, this can be almost impossible.

KEY ESG's intuitive software simplifies these processes. Our in-house team of experts ensure that our software is updated with every new regulation or requirement. We track new developments in sustainable investment so that you don't have to.

View ESG as an asset, rather than a hindrance. Find out how KEY ESG software could help you to leverage the potential of your portfolio or business and establish your competitive advantage.

If you have any questions at all, please feel free to get in touch with a member of our team. We'd be happy to advise you, regardless of where you are on your ESG journey.

Back to case study list

Mid-Market PE Fund
Our LPs are increasingly asking for portfolio company ESG performance. We want to move from being reactive to pro-active in our LP communications and own the narrative around our SFDR Article 8 designation.

Head of Investor Relations (IR)

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