The EC has proposed significant amendments to the SFDR in a bid to simplify transparency rules for financial products with environmental or social aims.
The changes are designed to address the regulation’s shortcomings, which have resulted in disclosures that are overly long, difficult to compare, and confusing for both professionals and retail investors.
Following a comprehensive review, the Commission found that the current SFDR framework has evolved into a de facto labelling system despite never being designed for that purpose. This has increased the risk of greenwashing and mis-selling, particularly as financial products have been marketed using sustainability terms that often lack clarity or consistency. As a result, the rules have not fully succeeded in directing capital towards the EU’s sustainable priorities.
The new proposal aims to make disclosures more concise, comparable, and better aligned with market realities, while also reducing the administrative burden on firms. By cutting unnecessary requirements, the Commission expects financial product providers to see lower compliance costs and greater clarity around how sustainability characteristics should be communicated. Retail investors, who have often struggled to interpret sustainability labels and technical reporting, stand to benefit from clearer, more user-friendly information.
A central part of the reform is the removal of entity-level disclosure requirements for financial market participants regarding principal adverse impact (PAI) indicators. These indicators have proved costly and complex to implement, and in many cases overlap with existing obligations under the Corporate Sustainability Reporting Directive (CSRD). Under the amended rules, only the largest firms already subject to CSRD thresholds would be required to report their environmental and social impacts. This approach is expected to significantly reduce duplication and ease reporting pressures, particularly for smaller firms.
At the product level, disclosure obligations will also be streamlined. The Commission proposes limiting reporting to information that is available, comparable, and genuinely meaningful to investors. These disclosures will be based on the core criteria underpinning a new product categorisation system, providing issuers with greater certainty when designing sustainable products. The simpler structure is intended to help retail investors more easily understand the sustainability profile of investment products.
The categorisation system, another major feature of the proposal, introduces three clear product groups: a “sustainable” category for investments already aligned with sustainability goals; a “transition” category for products supporting companies moving towards improved environmental or social outcomes; and an “ESG basics” category for products integrating ESG approaches that do not meet the stricter criteria of the other two groups. Products using ESG-related terms in their names or marketing will be required to fall into one of these categories.
Products will also be expected to ensure that at least 70% of their portfolios support the stated sustainability strategy, with investments in harmful industries excluded. These restrictions are intended to strengthen investor trust and curb instances of greenwashing by ensuring that ESG claims are substantiated by real underlying investments.
The SFDR has been in force since 2021, with technical standards added in 2022 and applied from 2023. The Commission’s new proposal updates the framework to reflect lessons learned from the regulation’s first years in practice and introduces the supervisory and categorisation foundations for the next phase of sustainable finance oversight. The proposal will now be reviewed by the European Parliament and the Council.
Find more on RegTech Analyst.
Keep up with all the latest FinTech news here
Copyright © 2025 FinTech Global
