EU Pushes SFDR Reform Forward Amid a Broader Push for Simplification

Key Takeaways

• SFDR Simplification: The European Commission has proposed amendments to simplify the Sustainable Finance Disclosure Regulation and reduce overlapping sustainability reporting requirements.
• Clear Product Categories: A new three-tier system for sustainable financial products aims to improve clarity for investors and limit greenwashing.
• Reduced Reporting Burden: Entity-level principal adverse impact disclosures would be removed for most firms, leaving only the largest companies covered by the Corporate Sustainability Reporting Directive.
• Streamlined Product Disclosures: Product-level reporting would be narrowed to clear, comparable information that is easier for retail investors to understand.
• Part of Broader EU Reforms: The proposal aligns with Brussels’ wider push to simplify digital, sustainability, and due diligence rules amid growing competitiveness concerns and international pressure.

Deep Dive

The European Commission is once again adjusting the shape of the EU’s sustainability rulebook, this time turning its attention to the Sustainable Finance Disclosure Regulation (SFDR). Published on 20 November 2025, the proposal aims to make sustainability disclosures far simpler, far shorter, and far easier for investors to understand. It is the clearest sign yet that Brussels is reassessing the administrative load of its sustainability agenda and looking for ways to bring consistency across a landscape that has grown unwieldy.

The Commission’s review of the current framework showed that disclosures had become too long, too complex, and too difficult for retail investors to compare. What was intended as a transparency regulation had, in practice, morphed into a labelling system, one that left investors guessing and increased the risk of greenwashing and mis-selling. The response is an attempt to cut down the noise without walking away from its long-standing goal of steering capital toward sustainable activities.

The proposal also arrives in a moment where the EU is under pressure to show it can balance sustainability with competitiveness. Similar reform efforts are emerging across Brussels, including the Commission’s digital simplification package promising €5 billion in reduced administrative costs and Parliament’s push to significantly narrow the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). In short, the EU is recalibrating, and the SFDR overhaul fits firmly into that trend.

Cutting Back the Clutter

A major feature of the proposal is its plan to delete entity-level disclosures on principal adverse impacts for most financial market participants. These requirements would remain only for the largest firms already captured under updated Corporate Sustainability Reporting Directive thresholds. The Commission argues that this cut removes duplication, reduces costs, and keeps the focus on disclosures that actually add value for investors.

On the product side, disclosures would be trimmed down to the information that is available, comparable, and genuinely meaningful. For retail investors, who have struggled to navigate dense sustainability documentation, the shift is intended to make sustainability features clearer and more intuitive. For product providers, it introduces more certainty in how sustainable characteristics are described and presented.

A Clearer Structure for ESG Claims

To address persistent confusion about what qualifies as a “sustainable” or “ESG” product, the proposal introduces a new, streamlined three-tier categorization system:

• Sustainable category for products investing in companies or projects that already meet high sustainability standards and contribute to environmental or social goals.
• Transition category for products supporting companies or projects that are not yet fully sustainable but are on a credible transition path or helping drive improvements.
• Environmental Social and Governance (ESG) basics category for products that apply ESG approaches but do not reach the criteria of the other two categories, such as exclusion strategies or best-in-class screens.

To use these labels, a product must allocate at least 70 percent of its portfolio toward the stated strategy and exclude investments tied to activities such as human rights violations, tobacco, prohibited weapons, or fossil fuels above certain thresholds. Environmental Social and Governance-related terms in product names and marketing would be reserved strictly for products that meet the category requirements, an explicit move to provide guardrails against greenwashing.

A Coordinated Shift Across the EU Regulatory Landscape

This proposal does not exist in isolation. It follows the February 2025 Omnibus I simplification initiative and closely mirrors Brussels’ broader effort to clean up overlapping rules.

In recent months:

• The Commission introduced a major digital reforms package, including European Business Wallets and streamlined cybersecurity reporting, intended to cut administrative burdens by billions of euros while clarifying obligations under NIS2, the AI Act, GDPR, and the Data Act.
• The European Parliament backed a plan to dramatically narrow sustainability reporting and due diligence obligations, reducing the scope of both directives to only a fraction of the companies originally covered.
• Transatlantic tensions have intensified, with more than 20 U.S. state attorneys general urging the Trump administration to oppose the CSRD and CSDDD, arguing they impose burdens on American firms and carry substantial compliance costs.

Against this backdrop, the SFDR overhaul can be seen as part of a larger attempt to show that the EU can pursue sustainability leadership while also cutting red tape, a message welcomed by companies, investors, and regulators alike.

What Next

The Sustainable Finance Disclosure Regulation has been in effect since March 2021, with technical standards applied since early 2023. The Commission’s latest proposals mark the most significant redesign since its adoption, focusing squarely on making sustainability disclosures more accessible and more consistent.

The proposal now heads to the European Parliament and the Council for deliberation. Negotiators will determine how quickly the changes move and how they align with the broader wave of simplification efforts currently underway.

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