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EU Commission Proposes New Sustainable and Transition Investment Fund Categories to Enhance SFDR

On November 20, 2025, the European Commission presented updates to the SFDR. The Commission wants to simplify ESG reports. It aims to help investors see fund differences. The changes boost transparency, cut needless detail, and promote sustainable finance in the EU.

Key Updates to the SFDR Framework

• New Fund Categories:
  The Commission drops the old Article 8 and Article 9 rules. It sets up a three-tier system that links funds directly to clear sustainability ideas:

  • Sustainable: Funds that work directly toward strong climate, environmental, and social goals.
  • Transition: Funds that help companies improve their sustainability. They link support to clear paths and allow some exclusions more lightly.
  • ESG Basics: Funds that add ESG metrics but do not fully meet Sustainable or Transition rules. They connect to strategies like best-in-class or exclusions.

• Stricter Exclusions:
  Funds must cut ties with harmful practices.

  • Sustainable funds rule out companies involved in fossil fuels and high greenhouse gas emissions.
  • Transition funds rule out firms that boost fossil fuel work, although they allow some coal-linked revenue.
  • All funds share a link: they exclude companies that harm human rights.

• Portfolio Requirements:
  Each fund must connect at least 70% of its investments to the ESG strategy it declares.

Simplified Disclosures and Reduced Compliance Burden

The proposal cuts and clarifies disclosures. It takes into account feedback that current SFDR documents are too long and hard.

• Large financial players will not share entity-level data on principal adverse impacts (PAIs).
• Product-level reports will give clear, comparable, and friendly data. This lets investors quickly grasp each fund’s sustainability traits.

Objectives and Impact

The Commission says these rules will make funds easier to compare. Investors gain clear insight into each fund’s sustainability aims. This clarity lowers the risk of greenwashing. Asset managers, pension funds, and others expect lower costs for compliance. With such changes, the EU strengthens its lead in global sustainable finance.

Background

SFDR started in 2021. It made asset managers reveal how they handle sustainability risks and impacts. A 2023 review found that the rules were too long and confusing. The old Article 8/9 labels often acted as simple ESG tags, which confused investors.

About the Author:
Mark Segal, founder of ESG Today, has over 20 years of experience in investment management and ESG research. He held roles at Delaney Capital Management. He earned an MBA from Columbia University and holds a CFA charter.

For investors and ESG professionals:
These SFDR changes offer a clear path toward better ESG standards. They help investors and firms make well-grounded sustainable decisions. Staying aware of the final rules will be key for using these sustainable finance options.

Source: ESG Today, November 20, 2025

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