European Commission proposes major overhaul of the SFDR to reduce complexity and cut reporting costs across the financial sector

New three-tier ESG product categorisation aims to improve clarity for retail investors and curb greenwashing.

Streamlined disclosures align with CSRD thresholds, shifting impacts reporting to only the largest financial market participants.

Brussels moves to reset Europe’s sustainable finance rulebook

The European Commission has proposed significant changes to the Sustainable Finance Disclosure Regulation, aiming to fix what policymakers view as a burdensome framework for companies and confusing for investors. This proposal seeks to simplify the system, reduce compliance costs, and offer a clearer guide for financial products with environmental or social claims.

Officials indicate that the review shows the rules, which were adopted in 2019 and came into effect in 2021, have effectively turned into a labeling system. Market participants have warned that the disclosures have become overly lengthy and hard to understand, hindering investors' ability to compare products and raising the risk of mis-selling.

The Commission argues that the regulation has therefore fallen short of its purpose: helping capital flow toward Europe’s sustainable priorities.

The package has two main goals. It seeks to enhance the usefulness and accessibility of information for investors, particularly households, and it alleviates the burden on financial product providers by eliminating redundant reporting obligations. The Commission believes these modifications will bolster Europe’s role in sustainable finance and increase engagement in capital markets as part of the EU’s Savings and Investments Union.

Cutting disclosure complexity and aligning with CSRD

A central element of the proposal is a significant shift in the scope of disclosures. The Commission plans to delete entity-level reporting on principal adverse impacts for most financial market participants. The intention is to eliminate duplication with the Corporate Sustainability Reporting Directive, which already obliges large companies to disclose sustainability impacts.

The Commission explains that this change “streamline corporate disclosures in the sustainable finance framework, addressing current overlaps between the Corporate Sustainability Reporting Directive (CSRD) and the SFDR.” Only the largest market participants falling under updated CSRD thresholds would continue to disclose their environmental and social impacts.

This initiative addresses widespread criticism that collecting data across extensive ESG indicators places excessive burdens, especially on smaller providers. The Commission's Omnibus I simplification package, released in February 2025, had already indicated a move towards streamlining reporting requirements. Today's proposal confirms this direction by concentrating SFDR solely on product transparency rather than the sustainability impacts at the firm level.

Disclosures at the product level would be reduced to include only information that is “available, comparable, and meaningful.” The Commission aims to offer investors clear guidance on a product’s sustainability features while providing providers with more certainty on how to describe those characteristics. Officials state that the changes will enable retail investors to “quickly and easily understand” sustainability claims.

Introducing a new EU system for ESG product categorization

The Commission is moving toward a simpler structure for classifying sustainable financial products, addressing widespread complaints that existing market practice around Articles 8 and 9 has created inconsistent expectations. The new approach proposes three categories, shaped by stakeholder feedback and grounded in established industry behaviour.

Products that directly contribute to environmental or social objectives are classified as sustainable, encompassing investments in companies or projects that already adhere to high standards. The transition category pertains to investments that aid companies in moving towards credible transition paths or in financing enhancements in climate, environmental, or social outcomes. The ESG basics category includes products that incorporate various ESG considerations but do not fulfill the criteria of the other two categories.

Significantly, the Commission intends to mandate that at least 70 percent of a product’s portfolio aligns with its stated sustainability strategy. Products using ESG terminology in their names or marketing materials must also eliminate exposure to harmful activities, such as companies violating human rights standards, and those involved in tobacco, banned weapons, or fossil fuels beyond specified limits.

According to the Commission, this structure will “simplify the investment journey of retail investors and help them make informed investment decisions.” It also seeks to rein in the proliferation of ESG claims, which supervisors across the EU have flagged as a significant greenwashing risk.

Governance and Supervision: A More Rigorous Framework Ahead

The proposal clarifies the supervisory structure and authorizes the Commission to create a limited set of implementing rules to enhance key product category features. These technical standards would add detail without reintroducing the complexity the reform intends to eliminate.

The changes would redefine how asset managers, insurers, pension funds, and advisers present sustainable products in the European market. For C-suite executives and institutional investors, the direction is clear: Europe aims to transition from a disclosure-heavy system to a more pragmatic framework focused on product integrity, transition financing, and retail accessibility.

What global investors should expect

If adopted, the proposal would reposition the SFDR as a sharper, more navigable regime that supports Europe’s capital-allocation goals. It could also influence rulemaking in other jurisdictions examining how to balance transparency, cost, and retail engagement. The Commission argues that the changes “bolster the EU’s leading role in sustainable finance and the competitiveness of its financial sector.”

The reforms are now entering negotiation stages with the European Parliament and Member States. The result will determine how Europe defines sustainable investment in the future and how global companies align their products within one of the world's most influential regulatory markets.