The European Commission has unveiled a major package of proposed updates to the Sustainable Finance Disclosure Regulation (SFDR), marking one of the most significant reforms to the EU’s sustainable finance framework since SFDR came into force in 2021.
The proposals aim to introduce clearer sustainability and transition investment categories, reduce the reporting burden on financial institutions, and curb the widespread misinterpretation of Article 8 and Article 9 classifications.
These changes also have important implications for how organisations shape their business sustainability strategies, as investor expectations for clarity and evidence-based ESG claims continue to rise.
Why the SFDR is being reformed
The proposals follow the Commission’s 2023 review of the SFDR framework, which highlighted widespread concerns around complexity, inconsistent disclosures, and unintended greenwashing risks. Many investors relied on Article 8 and Article 9 classifications as de facto sustainability labels, something the regulation was never designed to provide, leading to confusion about what constitutes a “sustainable” product. This misalignment, combined with lengthy, technical disclosure obligations, prompted the Commission to rethink the structure, purpose, and usability of SFDR.
Introducing a new three-tier classification system
At the centre of the reform is a simplified categorisation system replacing the current Article 8 and Article 9 regime. The Commission proposes three clearly defined product categories:
- Sustainable: Products contributing directly to environmental or social goals and meeting high sustainability standards.
- Transition: Products investing in companies or projects on a credible improvement pathway, focusing on emissions reductions or social/economic progress.
- ESG Basics: Products integrating ESG considerations but not meeting the criteria of the Sustainable or Transition categories.
The categories would be supported by exclusions (e.g., fossil-fuel-related activities, human rights violations) and a requirement that at least 70 per cent of a product’s portfolio align with its stated category. This approach aims to prevent weak claims, ensure consistent minimum standards, and help investors understand how ambitious a product truly is.
Build clarity around SFDR changes and strengthen preparedness through company-wide training
Reduced reporting burden for financial institutions
The Commission also proposes substantial reductions in disclosure obligations for financial market participants. Notably, the requirement for large firms to publish entity-level reports on principal adverse impacts (PAIs) would be removed.
Product-level disclosures would be simplified and made more accessible to retail investors, focusing on data that is available, decision-useful, and consistent across the three categories. The goal is both practical and strategic: cut compliance costs while boosting the usability of sustainability information.
What this means for sustainable finance
If adopted, the revised SFDR could reshape how asset managers design, market, and report on ESG and sustainability-focused funds. It would also help reduce greenwashing risk by shifting from ambiguous labels to clearer, rule-based classifications.
However, questions remain around implementation timelines, supervisory expectations, and how national regulators will adapt. For businesses and finance professionals, the direction of travel is clear: sustainable finance standards are tightening, not weakening.
Conclusion
The Commission’s proposed revisions to the SFDR represent a significant recalibration of the EU’s sustainable finance architecture. While the final shape of the framework will depend on upcoming negotiations, one message is clear: expectations for transparency, credibility, and robust sustainability governance are continuing to rise.
For organisations operating in this space, keeping pace with these shifts is essential to not only meet evolving disclosure requirements but to embed the capabilities needed to support responsible investment. If your team is preparing for SFDR changes, our corporate sustainability training solutions offer the practical insight, regulatory awareness, and strategic grounding needed to navigate this ever-changing landscape with confidence.
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