Design Delight Studio

SFDR Simplified: European Commission’s Revised Sustainable Finance Disclosure Regulation Proposal

By Douglas Bryden, Elisabeth Overland, Theresa Kreft, Léa Bareil, Charlotte Aspin, Emily Strand, Eden Elder, Leila Symonds

Overview

On 20 November 2025, the European Commission proposed key revisions to the Sustainable Finance Disclosure Regulation (SFDR), which mandates ESG (Environmental, Social, and Governance) disclosures for financial intermediaries and products within the EU. This update aims to address the current regime’s complexity, compliance costs, greenwashing risks, and misaligned concepts across EU sustainable finance legislation.

Drivers for the SFDR Reform

Since its implementation in 2021, SFDR has inadvertently functioned as a de facto labeling system for financial products, sparking concerns of greenwashing. Challenges include:

• Excessive complexity and administrative burden.
• Overlap and duplication with the Corporate Sustainability Reporting Directive (CSRD).
• Difficulties accessing reliable ESG data.
• Misalignment with other EU sustainability rules.

The Commission’s reform agenda emphasizes simplification to enhance market competitiveness and growth.

Key Objectives

1. Simplify and reduce administrative/disclosure burdens for financial market participants.
2. Improve transparency and comparability of sustainability information for end-investors, protecting them from misleading ESG claims.

Major Proposed Changes

1. Shift from Entity-Level to Product-Level Principal Adverse Impact (PAI) Disclosures

• Removal of entity-level PAI disclosures reduces duplication with CSRD and cuts annual disclosure costs by an estimated 25%.
• Products under the "Transition" and "Sustainable" categories (Articles 7 & 9) must disclose PAIs related to their investments.

2. Streamlined Disclosure Requirements

• Shorter, simpler product-level disclosure templates.
• Fewer sustainability topics with targeted, comparable indicators.
• Enhanced readability, especially for retail investors.

3. Narrowed Scope

• Financial advisers and portfolio managers are excluded from SFDR obligations under the new proposal.

4. Removal of “Sustainable Investments” Concept

• Eliminates the associated "do no significant harm" and "good governance" tests, which have been difficult to implement in practice.

5. Introduction of Revised Product Labels with Three Core Categories

The Commission acknowledges market needs for ESG labels, introducing:

• Transition Category (Article 7): Targets investments in companies/projects on credible sustainability transition paths with clear ESG objectives, excluding controversial sectors like tobacco, fossil fuels without phase-out plans, and human rights violators. Requires ≥70% alignment with category objectives.

• ESG Basics Category (Article 8): For products incorporating ESG factors beyond sustainability risk assessment but not targeting specific transition or sustainability goals.

• Sustainable Category (Article 9): For products with explicit sustainability objectives (text was truncated before complete description).

Each category has exclusion criteria and qualification thresholds to ensure credibility and consistency across ESG claims.

Implications

• The revisions aim to balance investor protection and market usability by simplifying disclosures and harmonizing ESG terminology.
• Expected to significantly reduce compliance costs and barriers for financial actors.
• Designed to enhance transparency, reduce greenwashing, and foster more effective sustainable finance practices within the EU.

Conclusion

The European Commission’s SFDR revision proposal marks a critical step towards a clearer, more efficient, and investor-friendly framework for ESG disclosures. By reducing complexity and aligning regulatory demands, it supports the EU’s broader sustainable finance agenda and contributes to a trustworthy green investment environment.

For details on this evolving regulation and implications for sustainable finance practices, stay tuned to our ongoing coverage.

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