SFDR Simplified - European Commission proposes a revised Sustainable Finance Disclosure Regulation

On 20 November 2025, the European Commission unveiled its proposed revisions to the Sustainable Finance Disclosure Regulation (SFDR), the EU’s disclosure framework for financial intermediaries and financial products regarding the integration of environmental, social and governance (ESG) factors into investment decisions. This proposal has been highly anticipated by the industry, given widespread views that the current regime is not fit for purpose.

Drivers for reform  

Since the SFDR started applying in 2021, it has, in practice, effectively operated as a quasi-labelling system for funds. The market’s use of the fund categorisation as a label has in itself led to concerns about greenwashing. The level of complexity is another area of challenge. Reform has also been driven by a perceived lack of effectiveness and costs of compliance, alongside duplication with requirements under the Corporate Sustainability Reporting Directive (CSRD), misalignment of concepts and definitions in other EU sustainable finance legislation, and challenges with accessing reliable and comprehensive ESG data.

The reform also fits with the priority of the Commission for this term: ensuring a simplification of the EU rulebook to foster competitiveness and growth. 

Against this background, the Commission has emphasised two objectives: 

1. Simplifying and reducing the administrative and disclosure requirements, and enhancing alignment with the operational needs of financial market participants; and
2. Improving end-investors’ ability to understand and compare sustainability-linked financial products, whilst protecting them against potentially misleading ESG-related claims.

A new approach 

There are a number of key changes in the Commission’s proposed revisions. 

Principal adverse impact (PAI) disclosures: The Commission proposes to remove entity-level PAI disclosures, reducing administrative burden. This change aims to address overlaps between the CSRD and the SFDR, in alignment with the Commission’s Omnibus 1 simplification package (see our recent blog post here for further details on Omnibus 1). Under the new proposal, the focus shifts towards disclosures at the product-level, as products falling under the Transition Category (Article 7) and Sustainable Category (Article 9) should identify and disclose PAIs of their investments on sustainability factors. The Commission has indicated that the removal of entity-level disclosures is expected to reduce annual disclosure costs by 25%, with the reduction in product-level disclosures and overall simplification through the three product categories leading to further savings.

Reduction in disclosable information: The proposal suggests product-level disclosure templates should be shortened and simplified, with the number of topics reduced. Disclosable information will align with the three revised product categories (see below) and involve fewer sustainability indicators, but with more targeted and comparable information. The revised disclosures are also intended to be easier for retail investors to understand. 

Reduced scope: The proposal calls for a narrowed scope, with financial advisers and portfolio managers no longer covered.

Removal of “sustainable investments” concept: The proposal entirely removes the current SFDR’s concept of “sustainable investments”. Consequently, the associated “do no significant harm” principle and “good governance” test would also be removed, concepts which are often considered tricky to apply under the current regime. 

Revised product labels: To further bolster investor protection and harmonisation, the proposal introduces three core product categories for financial products making ESG claims: the “Transition Category”, “ESG Basics Category” and “Sustainable Category”. In this way, the Commission has accepted the need of the market for ESG labels, despite the original approach seeking to avoid a labelling concept. Each of these categories excludes products from investing in certain industries or activities. Each category also has specific qualification thresholds, for example at least 70% of the portfolio must comply with the category's specific objectives. In summary: 

• The Transition Category (Article 7) covers products investing in companies or projects that are not yet sustainable, but are on a credible transition path (with clear and measurable environmental or social objectives), or investments contributing to improvements. It excludes investments in companies involved in tobacco, controversial weapons, human rights violations or companies generating significant revenues from coal or lignite. It also excludes firms developing new fossil fuel projects (coal, lignite, oil or gas) or those in coal/lignite power generation without a phase-out plan.
• The ESG Basics Category (Article 8) covers products which integrate a variety of ESG factors into their investment strategy (beyond the mere consideration of sustainability risks) but do not pursue a dedicated transition or sustainability objective and, therefore, do not meet the specific criteria of the Transition Category or Sustainable Category. It excludes investments in companies involved in tobacco, controversial weapons, human rights violations or companies generating significant revenues from coal or lignite. Unlike the Transition Category and the Sustainable Category, it does not exclude companies developing new fossil fuel projects or those in coal/lignite power generation without a phase-out plan.
• The Sustainable Category (Article 9) covers products contributing to sustainability goals with a clear and measurable objective. This category adopts the most stringent exclusions, including all the exclusions from the Transition Category, plus a broader exclusion of companies that are excluded from EU Paris-aligned benchmarks.
• Additional Categories are included in the framework, beyond the three core categories set out above. The Combination Category (Article 9a) covers two or more underlying financial products falling within Article 7 to 9 above. The Impact Category (Article 7(4)/Article 9(4) with Article 2(26)) covers products that fall within the Transition Category or the Sustainable Category that have an objective of making a “pre-defined, positive and measurable social or environmental impact”. Finally, Article 6a applies to all “Other” products that do not fall into any of the sustainability-related categories.

There are some similarities with the UK labelling regime under the UK’s Sustainability Disclosure Requirements (UK SDR), which created four sustainability investment labels for products with sustainability objectives that aim to improve or pursue positive outcomes for the environment or society.

Looking forward

The new categories and proposed changes from the Commission aim to provide a simpler process for investors to understand which products match their preferences on sustainability, while seeking to mitigate greenwashing risk. 

The new categorisation system also refers to fewer datapoints, with SFDR disclosures being adapted to data which will be available under the revised CSRD, reducing deviation between data points in each regime.

However, the proposed minimum investment commitments and mandatory exclusions will require attention and do not neatly map across. In particular, the “Other” (Article 6a) category may not be straightforward to align with for some managers. It imposes strict conditions which may complicate marketing and product development. This could potentially force some products into the Article 8 ESG Basics Category even if managers do not intend to offer a sustainability-focused product. 

As a result, funds may face tricky decisions on whether to step up to the new thresholds or not, especially as only products that comply with the criteria of the categories would be able to make ESG claims.

The industry will likely welcome any changes to SFDR that enhance alignment with other regimes, including the UK SDR. The UK Financial Conduct Authority is separately considering how to streamline and enhance its sustainability reporting framework and will be paying close attention to EU developments in this area given its stated focus on promoting international alignment and maintaining the UK’s position as a global leader in sustainable finance.

Implementation and next steps 

Significant work remains before SFDR 2.0 becomes law. The Commission’s proposal will now enter the usual co-decision procedure, whereby the European Parliament and the Council will separately examine and amend the Commission’s proposal before the three institutions try to agree on a final position through trilogues. There is no set timeline for this process, but it typically takes around 18 months depending on the complexity of the negotiations. 

The revised rules are proposed to take effect 18 months after the final legislation is published. As for existing products, how these will be treated will depend on both the fund’s type and current status. For example, for existing closed-ended funds that are fully raised and closed by the date the new regime takes effect, the manager will not need to apply the new framework.