SFDR and operational ESG: the difference between reporting and executing

Many funds have an impeccable ESG strategy on paper. Sustainability policies, net zero commitments, impact metrics. All precisely drafted.

But when you walk into the asset, reality looks different.

The energy performance certificate has expired. Actual consumption has never been measured. The HVAC installation is twelve years old and nobody has calculated its operating efficiency. And the ESG improvement plan in the fund's annual report has neither a budget nor a schedule tied to that specific asset.

That is the difference between reporting ESG and executing it. And it is the difference regulators, institutional investors and asset buyers are about to demand with far more precision.

What SFDR actually requires at asset level

The Sustainable Finance Disclosure Regulation (SFDR) requires funds classified under Article 8 or Article 9 to report on their assets using Principal Adverse Impact (PAI) indicators. Several of those indicators are specific to real estate assets:

• Carbon emissions intensity per square metre
• Energy consumption per square metre
• Share of assets with high-performance energy certification
• Exposure to physical climate risk
• Share of assets undergoing energy retrofit

Reporting those indicators requires real asset data. Not estimates. Not sector averages. Verified data from technical audits or monitoring systems installed in the building.

Most funds required to report these indicators do not have that data. And those who do often cannot verify it independently.

SFDR 2.0: what changes in 2026-2027

The review of the SFDR — known as SFDR 2.0 — removes Article 8 and 9 as quasi-labels and replaces them with three new categories: "Sustainable", "Transition" and "ESG Basics". Each category will have more precise eligibility criteria and will require technical evidence, not just a statement of intent.

Funds have until 2026 to complete the inventory of their assets and until 2027 to implement the technical and data processes required. Those arriving late will not be able to maintain their ESG classification, which directly affects their ability to raise institutional capital.

What executing ESG at asset level means

Executing ESG at asset level means having, for every property in the portfolio, at least:

A real energy diagnosis. Not the static energy performance certificate. An analysis of actual versus certified consumption, identifying the gap and its causes. In most commercial buildings that gap ranges from 20% to 40%.

A verified improvement plan. A programme of technical interventions with cost, timeline and expected emissions reduction per measure. Not a generic commitment to "energy efficiency improvement". A plan that can be audited.

Monitored consumption data. Electricity, gas, water, waste. Monthly, broken down by installation type. Without this data it is not possible to report real PAIs or to measure progress against the ESG strategy.

Current certifications. BREEAM, LEED, DGNB or equivalent, with a valid audit date. Expired certifications do not evidence the current condition of the asset.

The risk of stopping at reporting

Funds that have invested in ESG reporting without investing in operational ESG face a structural problem: when a regulator or a buyer in a sale process asks for technical evidence of the declared metrics, they will not be able to produce it.

This is already happening. In institutional portfolio transactions, buyers increasingly require independent ESG due diligence verifying the data declared by the seller. Assets that cannot evidence it must adjust price or leave the process.

Well-executed ESG protects asset value. ESG that is well reported but poorly executed creates reputational risk and a discount at exit.

What VMT verifies in an ESG due diligence

When we support a fund in an acquisition or a portfolio review, the ESG analysis includes:

• Verification of the energy performance certificate against real consumption
• Audit of building services with a calculation of current efficiency
• Identification of gaps against the fund's PAI indicators
• Estimate of the investment required to close those gaps
• Assessment of physical climate risks (flooding, extreme heat, drought) on the asset
• Review of valid certifications and a recommended roadmap

The result is a report the investment team can use in committee, in price negotiation and in the post-acquisition asset management strategy.