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On 20 November 2025, the European Commission (the "Commission") published its long-awaited legislative proposal to overhaul the Sustainable Finance Disclosures Regulation ("SFDR"). The reform aims to simplify the regime, address market confusion, and better align disclosure requirements with other EU sustainability frameworks.
A comprehensive review of SFDR by the Commission since 2023 has shown that the current framework results in disclosures that are too long and complex, making it difficult for investors to understand and compare the environmental or social characteristics of financial products.
Proposed changes
New voluntary product categories:
The existing Article 8 and Article 9 designations will be replaced
with three new voluntary categories for sustainability-related
financial products:
- Transition category: For products investing in companies/projects on a credible path to sustainability or contributing to such a transition (minimum 70% investment in transition-related assets).
- Sustainable category: For products with sustainability-related objectives and measurable outcomes (minimum 70% investment in sustainable assets).
- ESG basics category: For products integrating sustainability factors beyond risk management, but with more limited commitments.
Products investing in one or more of these categories (e.g., funds of funds) may avail of the product categorisation regime subject to certain requirements.
Mandatory criteria and exclusions:
Each category will have mandatory criteria, including minimum
investment thresholds and exclusions (e.g., fossil fuel expansion),
in line with ESMA's guidelines on fund names.
Removal of Article 8/9 and "sustainable
investment" definition:
The current Article 8 and 9 regime and the definition of
"sustainable investment" are deleted. The "do no
significant harm" and "good governance" requirements
are replaced by category-specific exclusions.
Streamlined disclosures and reporting:
- Entity-level principal adverse impact ("PAI") reporting and remuneration policy disclosures are removed for most market participants, except the largest firms already subject to the Corporate Sustainability Reporting Directive ("CSRD").
- Taxonomy-alignment disclosures are no longer mandatory.
- Pre-contractual and periodic report templates will be simplified and limited to two pages.
Opt-outs:
Closed-ended funds created and distributed before the reforms are
implemented may opt out of the new regime.
No change to sustainability risk
disclosure:
The obligation to disclose how sustainability risks are integrated
into investment decisions remains unchanged for all products.
Next steps
The proposal will now proceed through the EU legislative process and may be amended before it is finalised. The new regime is expected to apply 18 months after entry into force.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
