Design Delight Studio

Commission Proposes Major Overhaul of SFDR to Enhance Investor Clarity and Reduce Greenwashing Risks

Published: November 21, 2025

The European Commission has introduced reforms to the SFDR. The reforms aim to simplify how financial products share environmental and social facts. Many say the old rules are too complex, long, and uneven. They confuse both financial experts and everyday investors.

Key Issues Addressed

The SFDR started in 2021. In 2023, technical standards joined the rulebook. The regulation then began to act like a labelling system, even though it was not made for that. The Commission’s review found that this change led to more greenwashing. Sustainability claims became unreliable because they did not use a clear method. The rules did not help move funds to the EU’s sustainable goals.

Main Reform Highlights

• Streamlined Disclosures:
  The proposal cuts clutter. It makes sustainability data short, clear, and matched to market needs. This helps firms reduce work and aids investors in seeing the facts fast.

• Removal of Entity-Level PAI Requirements:
  Reporting on principal adverse impact is dropped for most firms. Only the largest firms covered by the CSRD will report. This change stops repeated tasks and focuses on real sustainability changes, especially for small firms.

• Product-Level Simplification:
  Disclosure now rests on available, comparable, and key data. The new rules bring a simpler way to group products by common criteria.

• New Product Categories:
  Financial products using ESG terms fall into three groups:

  1. Sustainable: Investments that fully meet sustainability goals.
  2. Transition: Investments that help companies boost environmental or social outcomes.
  3. ESG Basics: Products that use ESG ideas but do not meet tough sustainability tests.

• Portfolio Criteria and Exclusions:
  Products must show that at least 70% of their portfolio matches the stated sustainability strategy. They must also cut out investments in harmful industries to fight greenwashing.

Impact and Next Steps

The reforms cut overlaps with other EU sustainability rules. They also aim to lower compliance costs for firms. Investors see a clearer picture now. The European Parliament and the Council will next review the proposal. This marks a new step for sustainable finance in the EU.

Sources: European Commission proposal (Nov 2025), FinTech Global newsroom analysis

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