The EC has unveiled a major update to the SFDR, setting out plans to simplify transparency requirements for funds that promote environmental or social goals.
The proposal aims to fix long-standing issues with the current framework, which policymakers say has become overly complex, confusing for investors, and burdensome for financial institutions.
According to the Commission, its extensive review showed that SFDR disclosures have grown too long and technical, making it difficult for investors to compare financial products. The rules have also evolved into a de facto labelling regime, a role they were never intended to play, increasing the risk of greenwashing, mis-selling and inconsistent product classification across the market. As a result, the regulation has not fully succeeded in steering capital towards the EU’s sustainability priorities.
The proposed amendments seek to deliver clearer, shorter and more relevant disclosures, particularly for retail investors. Product providers are expected to benefit from lower compliance costs, while the EU hopes that more accessible information will encourage wider participation in capital markets. The initiative also supports broader efforts under the Savings and Investments Union to channel investment into sustainable activities and strengthen the competitiveness of the region’s financial sector.
A key part of the reform is the removal of entity-level principal adverse impact reporting for most financial market participants. The Commission argues that these requirements overlap with the Corporate Sustainability Reporting Directive (CSRD), creating duplication and unnecessary complexity. Under the new approach, only the largest firms already within the CSRD scope would continue to report on their environmental and social impacts. This change is expected to significantly reduce the amount of ESG data firms need to collect and publish.
At product level, disclosures would be limited to data that is available, comparable and meaningful. The revised framework places strong emphasis on helping investors assess core sustainability characteristics, with a focus on clarity, consistency and retail usability.
The Commission is also proposing a new ESG categorisation system with three distinct groupings. The “sustainable” category would cover products investing in assets that already meet high sustainability standards. A “transition” category would apply to strategies backing companies or projects progressing towards credible sustainability goals. Finally, the “ESG basics” category would capture other approaches that incorporate ESG factors but do not meet the higher thresholds of the first two groups.
Products wishing to use ESG-related terms in their names or marketing materials would need to fall within one of the three categories. To maintain integrity, at least 70% of the portfolio must support the stated sustainability strategy, and all categorised products must exclude investments linked to harmful activities such as human rights violations, tobacco, prohibited weapons and fossil fuels above set limits.
The Commission emphasised that the new system reflects significant industry feedback and aligns with recent supervisory guidance aimed at curbing greenwashing. It intends the categories to make it easier for retail investors to differentiate between investment strategies and understand what sustainability claims actually mean in practice.
The revised proposal will now be debated by the European Parliament and the Council. It builds on earlier updates to the SFDR and is expected to be supplemented by a targeted set of technical standards once finalised.
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