The European Commission published its proposal for amending the Sustainable Finance Disclosure Regulation (SFDR) on 20 November 2025, accompanied by a Q&A. The proposal also explicitly amends the PRIIPS Regulation and is understood to implicitly “moot” certain provisions of the Taxonomy Regulation that reference the SFDR.
The SFDR has been discussed in a previous post as a disclosure regulation, adopted with the objective to harmonize the provision of sustainability-related information in individual and collective investment activities by financial market participants, financial advisers and financial products. The Commission proposal introduces a second objective: the creation of a harmonized categorization of sustainability-related products.
This post covers the three key proposed changes: a substantial reduction of the obligations for financial market participants, a limitation of the scope to “collective investment”, and a shift from a disclosure to a categorization framework.
The SFDR as (primarily) financial product regulation
The SFDR applies to financial market participants, financial advisers, and financial products. In the Commission proposal, financial advisers are removed from the scope and the obligations for financial market participants are substantially reduced, making the SFDR primarily a regulation governing financial products. Financial market participants’ disclosures would be limited to disclosing policies on sustainability risks, namely how they consider the financial impact of environmental or social events on the returns of investments.
The Commission proposal no longer requires disclosures on how the investment decisions aggravate environmental or social challenges. Currently, the website of large financial market participants must have a detailed statement with the data on 20 specific environmental and social indicators, such as greenhouse gas emissions and board diversity, and the targets and actions to reduce the negative impact.
Back in the day, the Commission considered those disclosures an essential incentive for those large financial market participants to “pursue more sustainable investment strategies in terms of reducing negative externalities on sustainability caused by their investments”. The current Commission considers those obligations too costly and duplicative with the Corporate Sustainability Reporting Directive.
The SFDR as collective investment regulation
Another proposed change concerns the current definition of financial products, which includes collective investment vehicles, such as funds and pension products, but also individual portfolio management. The Commission proposal removes individual portfolio management from the scope, making the SFDR only applicable to collective investment.
The SFDR as a disclosure/categorization regime
By far the most important proposed amendment is replacing the disclosure obligations in Articles 8 and 9 SFDR with a categorization regime set out in the proposed article 7, 8 and 9, collectively defined as “sustainability-related products”. It is, however, important to note that all financial products will have to continue to disclose sustainability risks. In addition, information on sustainability factors, such as environmental or social matters, can be included in precontractual and periodic information of so-called “non-categorized products”, but it should not be a central element. This means that it should be secondary (meaning, ancillary) in the presentation of the product (described as less than 10% of the volume occupied by the description of the product’s investment strategy) and formulated in a neutral way. No reference to those factors should be made in marketing materials.
Common to the new sustainability-related product categories is that they are based on pre-defined criteria, which includes a combination of mandatory environmental and social exclusions (which do not apply to EU Green Bonds) and the requirement to invest for at least 70% in a way that meets the objective of the respective category as set out below.
Transition category
The proposed article 7 creates a “transition category” which is meant to cover those products that claim to contribute to a transition towards sustainability or claim to invest in the transition of undertakings, activities or assets towards sustainability. Products in this category should at least have 70% of investments meet a clear and measurable transition objective. The article provides several ways to meet the threshold, referring to familiar concepts (EU climate benchmarks and taxonomy-aligned investments), novel concepts (“credibility” of transition plans, science-based targets, sustainability-related engagement, and portfolio transition targets) and a catch-all provision of any credible contribution to the transition supported by proper justification. When those novel concepts or the catch-all provision are applied in the context of the mitigation of climate change, those criteria should be compatible with the transition to a sustainable economy, and the objective of the Paris Agreement and EU Climate Law.
It is presumed that the 70% threshold is met when at least 15% of the portfolio is taxonomy-aligned (for a discussion, see previous post). It is also presumed that all conditions of article 7 are complied with when a financial product replicates or is managed in reference to an EU climate benchmark.
ESG basics category
The proposed article 8 creates an “ESG basics” category which is meant to cover those products that claim to integrate sustainability factors beyond the consideration of sustainability risks. Here the 70% threshold reflects the proportion of the investments that integrates sustainability factors. The criteria to meet the 70% threshold are based on novel concepts (ESG ratings or another sustainability-indicator reflecting outperformance or “favoring” undertakings/activities with a “proven track record”) and a catch-all provision of other ways of such integration that is properly justified.
Sustainability category
The proposed article 9 creates a “sustainable” category which is meant to cover those products that claim to contribute to sustainability or claim to invest in sustainable undertakings, activities or assets. A broader set of exclusions apply to this category. Regarding the threshold, at least 70% of investments should meet a clear and measurable objective related to sustainability factors, including environmental and social objectives. The criteria to meet the 70% threshold are based on familiar concepts (EU Paris-Aligned Benchmark, taxonomy-aligned investments, EU Green Bonds and EuSEFs), novel concepts (undertakings or projects part of an EU budgetary guarantee or EU programme pursuing environmental or social objectives, and assets with a high level of performance in terms of sustainability standards comparable to the Paris-Aligned Benchmark, Taxonomy, or EU Green Bonds) and a catch-all provision of other investments contributing to an environmental or social objective based on a proper justification.
It is presumed that the 70% threshold is met when at least 15% of the portfolio is taxonomy-aligned. It is also presumed that all conditions of article 9 are complied with when a financial product replicates or is managed in reference to an EU Paris-aligned benchmark.
Sustainability-related product disclosures
Financial products covered by one of the three categories need to provide information in precontractual documents, periodic reports and on the website, the content and format of which is to be developed by the European Commission. These disclosure templates should be limited to two pages. The information should consist, inter alia, of a clear choice for one of the three categories, a description of the objective, an explanation of the composition of criteria used to meet the 70% threshold, the adoption of appropriate sustainability-related indicators, the actions to address underperforming assets, and information on data sources. When environmental objectives are pursued by a product in the Article 7 or 9 category, it should be indicated whether the criteria of the Taxonomy Regulation are used.
Finally, additional disclosures should be provided when the product applies Article 7 or 9 and has “impact”, meaning has the objective to generate pre-defined, positive and measurable social or environmental impact. Those “impact products” have to disclose, inter alia, a pre-set impact theory, the intended impacts and their measurement. Only those products may use the term “impact” in their name.
Concluding remarks
The Commission proposal primarily addresses the diverging approaches to sustainability built into the current SFDR. The current regime leaves discretion to financial market participants to provide their own normative thresholds for financial products considered sustainable under the current article 8 or 9 SFDR. The proposal fits in with a new approach to ESG Regulation, characterized by the EU setting normative thresholds in terms of exclusions and percentages of the portfolio that needs to be aligned with a sustainability, transition or impact objective. However, the Commission also considers those normative thresholds as a justification to reduce the duties related to data gathering in accordance with detailed, prescribed data points on environmental and social matters, which is a key characteristic of the current regime, both at the level of the financial market participant and the financial product. Despite the loss of data, the new approach appears more understandable for investors and in touch with existing sustainable finance terminology. But it also comes with risks. The use of novel concepts, the exact scope of which would have to be determined in new delegated acts, opens the door to new grey areas and would likely lead to all too familiar calls for supervisory clarifications in determining what sustainability (and now also, transition and ESG integration) actually means.
Arnaud Van Caenegem
Research fellow, KU Leuven
Attorney, A&O Shearman LLP
Corporate Finance Lab 