European Commission Proposes Major Overhaul of SFDR to Enhance Sustainable Finance Transparency

The European Commission (EC) has unveiled a comprehensive proposal to amend the Sustainable Finance Disclosure Regulation (SFDR), aimed at simplifying transparency obligations for financial products with environmental or social objectives. This initiative follows an in-depth review highlighting challenges faced by both investors and financial firms under the current framework.

Key Challenges Addressed

Since its enforcement in 2021 and subsequent technical standards in 2022, the SFDR has faced criticism for generating disclosures that are overly complex, lengthy, and difficult to compare. The regulation inadvertently evolved into a labelling mechanism, fostering risks of greenwashing and mis-selling through ambiguous ESG claims. Consequently, it has fallen short of effectively channeling investments toward the EU’s sustainability goals.

Simplifying and Streamlining Disclosures

To correct these issues, the Commission’s proposal emphasizes:

• Concise and Comparable Reporting: Focusing on meaningful, available data to improve clarity for retail and professional investors.
• Reduced Administrative Burden: Eliminating duplicative disclosure requirements lowers compliance costs and operational strain, particularly benefiting smaller firms.
• Removal of Entity-Level PAI Reporting: Principal adverse impact (PAI) disclosures at the entity level will be limited to the largest firms already under the Corporate Sustainability Reporting Directive (CSRD) scope, avoiding overlap.

Introduction of a Clear Product Categorisation System

A pivotal reform involves establishing three distinct sustainable finance product categories to foster transparency and investor confidence:

1. Sustainable: Investments fully aligned with sustainability objectives.
2. Transition: Products supporting firms progressing toward improved environmental or social outcomes.
3. ESG Basics: Products integrating ESG approaches without meeting the stricter criteria of the other categories.

Financial products employing ESG terminology will be mandated to fall within one of these categories, ensuring consistency and preventing misleading claims.

Strengthening Investor Protection Against Greenwashing

New rules require products to ensure that at least 70% of their portfolios align with their declared sustainability strategy, explicitly excluding investments in harmful industries. This threshold aims to substantiate ESG claims with verifiable underlying investments and build investor trust.

Next Steps

The proposed amendments will undergo review by the European Parliament and the Council before entering into force. This update represents the Commission’s response to lessons learned from the SFDR’s early implementation years and lays the groundwork for enhanced sustainable finance oversight moving forward.

Sources: European Commission announcement (November 21, 2025), FinTech Global industry analysis
Tags: SFDR, Sustainable Finance, ESG Regulation, European Commission, Greenwashing, CSRD

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