The European Commission’s proposed updates to the Sustainable Finance Disclosure Regulation (SFDR) will fundamentally alter how non-listed real estate funds report sustainability risks and impacts, according to legal and industry experts. Heike Schmitz, a partner at Herbert Smith Freehills, led the discussion on tightening disclosure requirements under Article 9, which applies to funds with sustainable investment objectives. The focus shifts to carbon reduction strategies and the practical hurdles of aligning real estate portfolios with the EU’s taxonomy and “do no significant harm” principles.
These revisions form part of a broader review of SFDR, sparking debates in Brussels over balancing investor demands for transparency with the operational challenges of real estate assets. Unlike listed funds, non-listed real estate portfolios often lack detailed emissions or environmental performance data, complicating compliance. The proposed changes may introduce standardized reporting templates, similar to those discussed in a recent briefing by Alistair Dryer of LaSalle Global Partners, to streamline disclosures and address inconsistencies in how funds classify sustainability risks.
A major adjustment involves transition funds, which invest in assets undergoing carbon reduction but do not yet meet EU taxonomy thresholds. Schmitz highlighted that policymakers are adopting a more flexible approach, allowing these funds to disclose under Article 9 if they demonstrate a credible decarbonization path. However, the exact standards for what qualifies as a “credible” strategy remain undefined, leaving room for interpretation.
UK’s AIFMD II clashes with real estate strategies
Simultaneously, the UK’s Alternative Investment Fund Managers Directive (AIFMD II) introduces mandatory liquidity management tools for open-ended real estate funds. The Financial Conduct Authority’s consultations, led by Gavin Haran, emphasize opportunities for adaptation but also potential conflicts between liquidity requirements and long-term real estate strategies. For example, funds may need to hold additional cash reserves, reducing capital available for acquisitions or renovations.
The launch of the first Reserved Investor Fund (RIF) in July 2026 adds another layer. This new structure, discussed by Tony Page of HM Revenue & Customs, aims to attract institutional capital into housing projects through tax advantages for investors targeting affordable or senior housing. Early adopters, such as Amvest’s De Trappenberg senior living fund, are embedding nature-positive strategies—like biodiversity enhancements—to align with the Taskforce on Nature-related Financial Disclosures (TNFD) framework.
These changes reflect a broader push by European regulators to integrate environmental and social metrics into real estate operations. The EU Taxonomy, for instance, now requires funds to prove that acquisitions substantially contribute to climate goals or risk non-compliance. Aleksandra Njagulj, Global Head of ESG at DWS, demonstrated in a recent briefing how her firm applies Section 7.7 of the taxonomy to evaluate building purchases. However, the process lacks uniformity across the industry, particularly for mixed-use or older buildings where retrofitting data is limited.
EU Taxonomy tightens acquisition and ownership rules
The proposed SFDR revisions will enforce stricter alignment between funds’ sustainability disclosures and the EU Taxonomy’s technical screening criteria, especially under Section 7.7 (Acquisition and Ownership of Buildings). Njagulj explained that funds may need to show their real estate acquisitions contribute substantially to at least one of the taxonomy’s six environmental objectives-such as climate change mitigation or adaptation-while avoiding significant harm to the other five.
The evaluation involves three steps: verifying the asset’s primary function aligns with taxonomy activities, confirming compliance with minimum safeguards (e.g., no deforestation or human rights violations), and calculating environmental performance against sector-specific benchmarks. However, as noted in INREV’s Introduction to EU Taxonomy briefing, many funds still lack standardized methodologies for measuring these contributions, particularly for older or mixed-use buildings.
To address reporting inconsistencies, the Aligning Real Estate Sustainability Indicators (ARESI) initiative, a collaboration by CBRE Investment Management, IIGCC, and other industry groups, has proposed a set of harmonized key performance indicators (KPIs). Robbie Epsom of CBRE presented a core framework of 12 metrics, including Scope 1-3 emissions intensity, energy efficiency ratios, and biodiversity net gain metrics, designed to align SFDR, the EU Taxonomy, and the Taskforce on Nature-related Financial Disclosures (TNFD).
While the ARESI framework is voluntary, its adoption could reduce the burden on funds handling multiple reporting regimes. Funds using the TNFD LEAP approach, as demonstrated by APG AM’s Lucas Wouters, can align their nature-related disclosures with SFDR’s Article 8 or Article 9 classifications by integrating tools like IBAT (Initiative for Biodiversity Assessment Tool) or STAR (Science-Based Targets for Nature) into due diligence.
Liquidity rules strain sustainability investment flexibility
The UK’s AIFMD II amendments introduce mandatory liquidity management tools, which may indirectly influence SFDR reporting. Matt Huggett of Allen & Overy noted this could force funds to reallocate capital away from acquisitions or sustainability upgrades-particularly for assets requiring long-term capital expenditure. Funds investing in transition assets may struggle to balance liquidity reserves with the higher upfront costs of energy retrofits or renewable infrastructure. The Financial Conduct Authority’s consultations suggest funds could mitigate this by securing pre-committed liquidity facilities or adjusting redemption terms, but such measures may reduce investor flexibility.
A parallel development is the Market Integration and Supervision Package (MISP), proposed by the European Commission to streamline cross-border fund supervision. Emily Harmsworth of Linklaters discussed how the MISP aims to reduce fragmentation in how national regulators apply SFDR and AIFMD rules, particularly for non-listed real estate funds operating across jurisdictions.
One key proposal is a pan-European passport for alternative investment funds, which would allow them to market assets in multiple EU member states under a single authorization. However, as Rahul Manvatkar of Linklaters noted, the package does not address discrepancies in how countries interpret Article 9’s “sustainable investment” criteria. For example, Germany’s BaFin has taken a strict stance on transition fund disclosures, while Luxembourg’s CSSF has adopted a more flexible approach, creating uneven compliance expectations for cross-border funds.
