The European Commission’s proposal to reform the Sustainable Finance Disclosure Regulation (SFDR) marks the start of a major overhaul of EU sustainable finance, signalling the most sweeping changes to the framework since its original adoption.
Published on 20 November 2025, the proposed amendments formalise SFDR’s evolution into a de facto labelling regime, reshape product categorisation, and streamline disclosures across the market. For financial institutions, the package represents both a simplification effort and a significant shift in approach that will demand careful preparation.
Zeidler Group, which provides compliance tools for investment firms, recently delved into what the proposed SFDR reform means for compliance.
Alongside the reforms to the core regulation, the package introduces targeted amendments to the PRIIPs Regulation and repeals the existing SFDR Level 2 Delegated Regulation. The European Commission has also reduced the scope of product-level disclosure rules by removing obligations for financial advisers and portfolio managers. Alternative investment funds marketed solely to professional investors fall outside the new categorisation regime, although they remain subject to other parts of SFDR.
The proposal follows extensive consultation and an in-depth review of SFDR since its implementation in March 2021. While SFDR has become a pillar of the EU’s sustainable finance agenda, it has also drawn sustained criticism. Market participants have highlighted lengthy templates, inconsistent definitions, misalignment with the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy Regulation, and widespread misunderstanding of Articles 8 and 9, Zeidler explained.
Central to the reform is a fundamental change in approach: moving from a pure disclosure regime to a product categorisation framework. Under the proposals, three new sustainability-related product categories would replace the market’s reliance on Articles 8 and 9. Each category requires a minimum 70% investment commitment aligned with its stated objective, a mandatory list of exclusions—including coal, controversial weapons, tobacco, and serious international-norms violations—and a defined set of permitted investment types. The categories include Transition products supporting decarbonisation pathways, ESG Basics products incorporating sustainability characteristics, and Sustainable products that pursue clear sustainability objectives.
Firms would need to map their existing funds against these new categories, reviewing investment strategies, ambition levels, exclusion compatibility, and underlying holdings. Those that do not fit the criteria may need to be re-positioned, re-named, or withdrawn from sustainability-related marketing.
The overhaul also restructures entity- and product-level requirements. The proposal removes entity-level principal adverse impact disclosures and remuneration-policy-related reporting.
The reforms also aim to improve alignment across the broader EU sustainable finance landscape. For example, mandatory Taxonomy-alignment disclosures would apply only where products claim investment in environmentally sustainable activities.
A further layer of requirements targets the use of external data. Firms will need formal agreements for third-party data sources and documented methodologies for any estimates they generate themselves, reinforcing governance around sustainability-related information.
To prepare, firms must update product documentation, marketing materials, internal processes, governance structures, and data-management frameworks. The reforms are intended to reduce greenwashing risks and improve investor trust, but they will require substantial short-term resource allocation and careful transition planning.
For more insights into the SFDR reform, read the story here.
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