Why financial institutions need strong climate transition plans under SFDR

The EU’s Sustainable Finance Disclosures Regulation (SFDR) is reinforcing the need for credible transition plans by requiring financial institutions to disclose how they account for sustainability risks in their investments. While the SFDR does not explicitly require a climate transition plan, it aligns with the recommendations of other frameworks and regulations, which increasingly advocate for them. The EU’s Corporate Sustainability Reporting Directive (CSRD) and the UK’s Transition Plan Taskforce (TPT) mandate detailed transition plans for some businesses as part of their net zero-aligned strategies. The ISSB also encourages creating a climate transition plan in line with TCFD recommendations. A well-structured climate transition plan is more detailed than a net zero plan and is not just about helping businesses stay compliant—it can help secure investor confidence, access capital and stay competitive in a rapidly evolving market.

Under Articles 6, 8, and 9 of the SFDR, financial institutions must disclose the following:

• Article 6: Requires financial institutions to disclose how sustainability risks are integrated into investment decisions, which may include transition planning
• Article 8: For financial products promoting environmental or social characteristics, disclosure must include how sustainability risks—such as transition plans—are assessed
• Article 9: Funds with sustainable investment objectives must demonstrate how their investments contribute to sustainability goals, such as net zero alignment via credible transition plans

A well-structured climate transition plan supports the SFDR by offering investors the data and roadmap they need for both compliance and sustainable investment decision-making. It outlines how a company will adapt its business model and operations to thrive in a low-carbon economy by detailing the strategic steps it will take to reduce greenhouse gas (GHG) emissions, align with net zero targets, and manage climate-related risks and opportunities. 

To align their climate transition plan with the SFDR, businesses should:

• Set science-based targets aligned with the Paris Agreement and other climate objectives
• Develop credible decarbonisation pathways across operations and the value chain
• Embed sustainability risks and opportunities into business strategy by identifying how physical and transition risks will impact your business model
• Strengthen governance and accountability by defining oversight and execution responsibilities
• Consider principal adverse indicators (PAI) to measure and track how your investments negatively impact environmental and social factors and identify gaps to work towards having complete ESG data
• Provide financial metrics, such as capital expenditures (CapEx) or operating expenditures (OpEx), allocated to support the green finance transition
• Track and disclose progress to ensure transparent ESG reporting on progress and impact

For financial institutions, the SFDR makes it clear that sustainability considerations must be embedded in investment strategies. Companies without a credible climate transition plan risk missing out on capital, facing increased scrutiny and falling behind in the low-carbon economy. By aligning transition plans with the SFDR requirements, financial institutions can meet regulatory expectations, attract investment and future-proof their businesses.

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South Pole can support you in developing and implementing credible climate transition plans that meet the SFDR and other regulatory requirements. Our team of technical experts, sustainability strategists and communications consultants are here to guide you in setting science-based targets, mapping emissions reduction pathways and integrating climate risks into your business strategy.