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EU Commission Proposes New Sustainable and Transition Fund Categories Under SFDR

On November 20, 2025, the European Commission unveiled significant proposed updates to its Sustainable Finance Disclosure Regulation (SFDR), aiming to enhance transparency, simplify compliance, and improve the comparability of sustainability-focused investment products. These reforms reflect the Commission’s ongoing commitment to fostering sustainable finance and accelerating the transition to a greener economy.

Key Changes: New Fund Categories to Replace Article 8 and 9 Labels

The current SFDR framework, effective since 2021, requires asset managers and pension funds to disclose sustainability information linked to their investment products. However, feedback from a comprehensive 2023 review highlighted issues such as complex disclosures and misuse of Article 8 and 9 product classifications as unofficial sustainability labels, potentially misleading investors and raising greenwashing risks.

To address this, the Commission proposes replacing the existing Article 8 (“light green”) and Article 9 (“dark green”) classifications with a clearer, three-tier system that better reflects the products’ sustainability ambitions:

• Sustainable: Funds contributing directly to high-standard sustainability goals (climate, environmental, social) and excluding companies active in fossil fuels or high-emitting sectors.
• Transition: Funds investing in companies on credible sustainability transition paths, with less stringent exclusions (e.g., allowing some coal revenue) but still aligned with improvement objectives.
• ESG Basics: Funds integrating ESG approaches such as excluding worst performers or focusing on best-in-class metrics, but not meeting the criteria for Sustainable or Transition categories.

Each category requires at least 70% of the portfolio to adhere to the respective ESG strategy and shares social exclusion criteria (e.g., companies violating human rights).

Simplified Disclosures and Reduced Compliance Burden

The proposed updates also aim to reduce reporting complexity for financial market participants (FMPs):

• Elimination of entity-level disclosures for FMPs with over 500 employees regarding principal adverse impacts on sustainability.
• Streamlined product-level disclosures focusing only on data that is available, comparable, meaningful, and relevant to the newly defined fund categories.
• Enhanced retail-friendliness of disclosures to help everyday investors quickly grasp sustainability features.

The Commission emphasized these changes will provide clearer, simpler information to investors, protect them better against misleading ESG claims, and reduce costs for providers—strengthening the EU’s leadership in sustainable finance.

Context and Outlook

Since its launch, the SFDR has sought to mobilize private capital towards sustainability and support companies in transition. Yet, the evolving market dynamics and investor needs necessitated these enhancements to sustain trust and impact. The new proposal responds directly to stakeholder feedback and aims for greater clarity and effectiveness as the EU advances its green finance agenda.

As Mark Segal, founder of ESG Today, notes, these amendments will make the investment journey easier and more transparent, facilitating better-informed investment decisions while boosting competitiveness in Europe’s financial sector.

About SFDR: The Sustainable Finance Disclosure Regulation mandates transparency on how financial products integrate sustainability risks and impacts, promoting sustainable investment across the EU.

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