The EU Commission has proposed a set of amendments to the Sustainable Finance Disclosure Regulation (SFDR), the EU’s transparency framework for financial products integrating environmental or social aims.
The Commission says the changes are designed to address current ‘shortcomings’, making the rules simpler, more efficient, and better aligned with market realities. The revised rules will also be more retail-friendly and usable for companies.
A Commission review has shown that the current framework results in disclosures that are too long and complex, making it difficult for investors to understand and compare the environmental or social characteristics of financial products. Moreover, the SFDR has effectively been used as a de facto labelling system, causing confusion – particularly for retail investors – and increasing the risk of greenwashing and mis-selling.
Key elements of the proposal
- Simplified disclosures
The Commission proposes to delete entity-level disclosure requirements for Financial Market Participants (FMPs) regarding principal adverse impacts indicators. The aim is to streamline corporate disclosures in the sustainable finance framework, addressing current overlaps between the Corporate Sustainability Reporting Directive (CSRD) and the SFDR. This aligns with the Commission’s Omnibus I simplification package from February 2025, and significantly reduces the implementation costs associated with the SFDR. In the future, only the largest FMPs subject to the updated thresholds under the CSRD will need to disclose their impacts on the environment and society. Removing entity-level disclosures from the SFDR significantly cuts reporting requirements and costs associated with collecting data across a wide range of environmental, social and governance (ESG) topics and removes duplications.
The Commission is also proposing a significant reduction in product-level disclosures, limiting them to data that is available, comparable, and meaningful. Focused on the key criteria underpinning the proposed product categories (see point b. below), this will give providers more clarity and certainty on how to design and present the sustainability characteristics or objectives of their products, making them more relevant and comparable for investors. The revised disclosures will also be more retail friendly, helping retail investors to quickly and easily understand the sustainability features of financial products.
- A clear categorisation system
Based on a wide consensus in stakeholder feedback, the Commission is proposing a simple categorisation system for financial products making ESG claims. It will comprise three categories with clear criteria, building on existing market practices that have been informed by the latest regulatory guidance. The categories will simplify the investment journey of retail investors and help them make informed investment decisions. Broadly, the categories will be:
- ‘Sustainable category’: products contributing to sustainability goals (e.g. climate, environment or social goals), such as investments in companies or projects that are already meeting high sustainability standards;
- ‘Transition category’: products channeling investments towards companies and/or projects that are not yet sustainable, but that are on a credible transition path, or investments that contribute toward improvements in e.g. climate, environment or social areas;
- ‘ESG basics category’: other products that integrate a variety of ESG investment approaches but do not meet the criteria of the above-mentioned sustainable or transition investment categories (e.g. focusing on best-in-class performers on a given ESG metric, pursuing financial returns while excluding the worst ESG performers).
Categorised products would need to ensure that a high portion of investments (70% of the portfolio) supports the chosen sustainability strategy and exclude from all their portfolio investments in harmful industries and activities, for example companies in violation of human rights standards as well as those involved in tobacco, prohibited weapons and fossil fuels above certain limits. ESG claims in names and in marketing documentation will be reserved for categorised products – this is a key step to fight greenwashing and boost trust in sustainable investments.
