The European Commission published on 20 November 2025 a comprehensive revision of the Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR). This marks the most significant reform of the EU's sustainable finance disclosure framework since its adoption in 2019. This proposal has two aims: to simplify and reduce the sustainability-related administrative and disclosure requirements for financial market participants and to improve end-investors ability to understand and compare sustainability-linked financial products.
Why a reform is needed
The SFDR was currently not being used solely as a disclosure framework as intended, but also as a labelling and marketing tool (in particular the disclosures under Articles 8 and 9). This has increased the risk of greenwashing and mis-selling.
Key changes:
- Removal of entity level disclosures
- Significant reduction of the product level disclosures
- Introduction of a categorisation system with three categories.
Three-category system
The centrepiece of the reform is a three-way categorisation of financial products with ESG features, incorporating wide stakeholder feedback and largely building on current market practices. The new framework introduces:
- Transition category (revised Article 7):
- ESG basic category (revised Article 8):
- Sustainable category (revised Article 9):
Financial products making investments in companies and/or projects that are not yet sustainable, but have a 70% threshold linked to the proportion of investments to meet a clear and measurable transition objective related to sustainability factors, including environmental or social transition objectives in accordance with the binding elements of the investment strategy of the financial product, measured using credible appropriate sustainability-related indicator(s).
They must also comply with the list of exclusions referring to the exclusions for the Climate Transition Benchmarks and Paris – Aligned Benchmarks.
Such financial products must also exclude investment in companies developing new projects linked to coal, oil, gaseous fuels as well as developing projects for exploring mining, extraction or distribution.
Lastly, financial market participants (“FMP”) have to identify and disclose the principal adverse impacts of their investments, on sustainability factors, and explain any actions taken to address those impacts. FMP may choose to comply in full or in part with the disclosure requirement mentioned by using appropriate sustainability-related indicators.
The same social exclusions as for the transition category above apply, as well as an exclusion of companies generating significant revenues from coal. 70% of the portfolio must be linked to the proportion of investments integrating the sustainability factors in accordance with the binding elements of the investment strategy of the product, measured using appropriate sustainability -related indicators. The assessment of performance against the objective should be monitored and disclosed based on appropriate indicators chosen by the FMP.
Financial products that invest in sustainable undertakings, sustainable economic activities, or other sustainable assets must have a 70% threshold linked to the proportion of investments to meet a clear and measurable objective related to sustainability factors, including environmental and social objectives, in accordance with the binding elements of the investment strategy of the product, measured by using appropriate sustainability -related indicators.
They must also comply with the list of exclusions referring to the exclusions for the Climate Transition Benchmarks and Paris – Aligned Benchmarks.
The assessment of performance against the objective should be monitored and disclosed and should be based on appropriate indicators chosen by the FMP. Any principal adverse impacts on environmental or social factors should be identified and clearly disclosed including the actions taken to address them.
For all three categories the use of the term “impact” is limited to products explicitly pursuing measurable positive, social or environmental impact.
Exemptions
FMPs may choose not to apply this Regulation to the financial product of the closed-ended type which were created and distributed before the date of application of the Regulation.
Simplification measures: reducing administrative burden
Entity-level disclosure requirements are deleted, meaning that the requirement for disclosures in relation to the principal adverse impacts at both entity level and product level is removed. In addition, financial market participants will no longer be required to include information in their remuneration policies on how sustainability is incorporated into their remuneration policies nor to disclose such information on their website. Financial advisers are removed from the scope of the regulation entirely, as they do not manufacture or manage sustainability-related financial products, nor do they make such products available to investors. The aim is to streamline corporate disclosures in the sustainable finance framework and addressing any overlaps between the Corporate Sustainability Reporting Directive (CSRD) and the SFDR.
Strengthened greenwashing protections
The proposal introduces specific transparency restrictions for non-categorised products, ensuring that sustainability information is not used in the name or marketing communications of non-categorised financial products and is not a central element of the pre-contractual disclosures.
The current approach to ensuring "do no significant harm" (“DNSH”) is replaced by mandating financial market participants to apply a common set of clear exclusions covering practices and sectors which are commonly agreed to be most harmful, ensuring a comparable and clear approach.
What this means for FMP
For financial market participants (AIFMs and UCITS mancos):
- Product-level costs expected to be saved thanks to the significant reduction of product-level disclosures. Lower administrative burden on FMPs.
- Existing Article 8 and 9 products will need to be reassessed against the new three-category framework, though the proposals build on existing market practices, notably reflecting the ESMA fund name guidelines.
- Financial market participants will need to document their use of data sources and external and in-house estimates, and provide clients with information on such use upon request.
For investors:
- Greater clarity and comparability across sustainable investment products through standardised categories with clear minimum criteria.
- Pre-contractual and periodic disclosures for categorised products will contain all relevant information about the objective, strategy, investment approaches, chosen indicators for measuring performance, compliance with applicable exclusions, and relevant data sources.
- Enhanced protection against greenwashing through stricter naming rules and marketing restrictions.
For distributors:
- Categories will help distributors identify products that match their clients' sustainability preferences and perform their target market assessment, with changes to be reflected in MiFID and IDD delegated acts.
Next steps and timeline
The Commission proposal will now be negotiated by the co-legislators.
The Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
The Commission will be empowered to adopt delegated acts to lay down for instance but not limited to, the conditions for investments to contribute to the transition related objective as well as the details of the prestation of the information to be disclosed for article 7 products but also the conditions for investment to integrate sustainability factors for article 8, and for article 9 to specify the conditions for investments to contribute to the sustainability related objective.
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