The European Fee printed its proposal for amending the Sustainable Finance Disclosure Regulation (SFDR) on 20 November 2025, accompanied by a Q&A. The proposal additionally explicitly amends the PRIIPS Regulation and is known to implicitly “moot” sure provisions of the Taxonomy Regulation that reference the SFDR.
The SFDR has been mentioned in a earlier put up as a disclosure regulation, adopted with the target to harmonize the supply of sustainability-related info in particular person and collective funding actions by monetary market members, monetary advisers and monetary merchandise. The Fee proposal introduces a second goal: the creation of a harmonized categorization of sustainability-related merchandise.
This put up covers the three key proposed adjustments: a considerable discount of the obligations for monetary market members, a limitation of the scope to “collective funding”, and a shift from a disclosure to a categorization framework.
The SFDR as (primarily) monetary product regulation
The SFDR applies to monetary market members, monetary advisers, and monetary merchandise. Within the Fee proposal, monetary advisers are faraway from the scope and the obligations for monetary market members are considerably lowered, making the SFDR primarily a regulation governing monetary merchandise. Monetary market members’ disclosures could be restricted to disclosing insurance policies on sustainability dangers, particularly how they think about the monetary influence of environmental or social occasions on the returns of investments.
The Fee proposal now not requires disclosures on how the funding selections worsen environmental or social challenges. Presently, the web site of enormous monetary market members will need to have an in depth assertion with the info on 20 particular environmental and social indicators, equivalent to greenhouse gasoline emissions and board variety, and the targets and actions to cut back the destructive influence.
Again within the day, the Fee thought-about these disclosures a vital incentive for these massive monetary market members to “pursue extra sustainable funding methods when it comes to lowering destructive externalities on sustainability attributable to their investments”. The present Fee considers these obligations too expensive and duplicative with the Company Sustainability Reporting Directive.
The SFDR as collective funding regulation
One other proposed change issues the present definition of economic merchandise, which incorporates collective funding automobiles, equivalent to funds and pension merchandise, but in addition particular person portfolio administration. The Fee proposal removes particular person portfolio administration from the scope, making the SFDR solely relevant to collective funding.
The SFDR as a disclosure/categorization regime
By far an important proposed modification is changing the disclosure obligations in Articles 8 and 9 SFDR with a categorization regime set out within the proposed article 7, 8 and 9, collectively outlined as “sustainability-related merchandise”. It’s, nonetheless, essential to notice that every one monetary merchandise must proceed to reveal sustainability dangers. As well as, info on sustainability components, equivalent to environmental or social issues, could be included in precontractual and periodic info of so-called “non-categorized merchandise”, but it surely shouldn’t be a central aspect. Which means it ought to be secondary (that means, ancillary) within the presentation of the product (described as lower than 10% of the amount occupied by the outline of the product’s funding technique) and formulated in a impartial means. No reference to these components ought to be made in advertising and marketing supplies.
Widespread to the brand new sustainability-related product classes is that they’re primarily based on pre-defined standards, which features a mixture of obligatory environmental and social exclusions (which don’t apply to EU Inexperienced Bonds) and the requirement to take a position for at the very least 70% in a means that meets the target of the respective class as set out under.
Transition class
The proposed article 7 creates a “transition class” which is supposed to cowl these merchandise that declare to contribute to a transition in the direction of sustainability or declare to put money into the transition of undertakings, actions or belongings in the direction of sustainability. Merchandise on this class ought to at the very least have 70% of investments meet a transparent and measurable transition goal. The article supplies a number of methods to fulfill the brink, referring to acquainted ideas (EU local weather benchmarks and taxonomy-aligned investments), novel ideas (“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 correct justification. When these novel ideas or the catch-all provision are utilized within the context of the mitigation of local weather change, these standards ought to be suitable with the transition to a sustainable economic system, and the target of the Paris Settlement and EU Local weather Regulation.
It’s presumed that the 70% threshold is met when at the very least 15% of the portfolio is taxonomy-aligned (for a dialogue, see earlier put up). Additionally it is presumed that every one situations of article 7 are complied with when a monetary product replicates or is managed in reference to an EU local weather benchmark.
ESG fundamentals class
The proposed article 8 creates an “ESG fundamentals” class which is supposed to cowl these merchandise that declare to combine sustainability components past the consideration of sustainability dangers. Right here the 70% threshold displays the proportion of the investments that integrates sustainability components. The standards to fulfill the 70% threshold are primarily based on novel ideas (ESG scores or one other sustainability-indicator reflecting outperformance or “favoring” undertakings/actions with a “confirmed monitor file”) and a catch-all provision of different methods of such integration that’s correctly justified.
Sustainability class
The proposed article 9 creates a “sustainable” class which is supposed to cowl these merchandise that declare to contribute to sustainability or declare to put money into sustainable undertakings, actions or belongings. A broader set of exclusions apply to this class. Relating to the brink, at the very least 70% of investments ought to meet a transparent and measurable goal associated to sustainability components, together with environmental and social goals. The standards to fulfill the 70% threshold are primarily based on acquainted ideas (EU Paris-Aligned Benchmark, taxonomy-aligned investments, EU Inexperienced Bonds and EuSEFs), novel ideas (undertakings or initiatives a part of an EU budgetary assure or EU programme pursuing environmental or social goals, and belongings with a excessive stage of efficiency when it comes to sustainability requirements akin to the Paris-Aligned Benchmark, Taxonomy, or EU Inexperienced Bonds) and a catch-all provision of different investments contributing to an environmental or social goal primarily based on a correct justification.
It’s presumed that the 70% threshold is met when at the very least 15% of the portfolio is taxonomy-aligned. Additionally it is presumed that every one situations of article 9 are complied with when a monetary product replicates or is managed in reference to an EU Paris-aligned benchmark.
Sustainability-related product disclosures
Funds lined by one of many three classes want to offer info in precontractual paperwork, periodic reviews and on the web site, the content material and format of which is to be developed by the European Fee. These disclosure templates ought to be restricted to 2 pages. The data ought to consist, inter alia, of a transparent alternative for one of many three classes, an outline of the target, a proof of the composition of standards used to fulfill the 70% threshold, the adoption of applicable sustainability-related indicators, the actions to handle underperforming belongings, and knowledge on knowledge sources. When environmental goals are pursued by a product within the Article 7 or 9 class, it ought to be indicated whether or not the standards of the Taxonomy Regulation are used.
Lastly, extra disclosures ought to be supplied when the product applies Article 7 or 9 and has “influence”, that means has the target to generate pre-defined, constructive and measurable social or environmental influence. These “influence funds” must disclose, inter alia, a pre-set influence concept, the meant impacts and their measurement. Solely these funds could use the time period “influence” of their title.
Concluding remarks
The Fee proposal primarily addresses the diverging approaches to sustainability constructed into the present SFDR. The present regime leaves discretion to monetary market members to offer their very own normative thresholds for monetary merchandise thought-about sustainable below the present article 8 or 9 SFDR. The proposal suits in with a new method to ESG Regulation, characterised by the EU setting normative thresholds when it comes to exclusions and percentages of the portfolio that must be aligned with a sustainability, transition or influence goal. Nevertheless, the Fee additionally considers these normative thresholds as a justification to cut back the duties associated to knowledge gathering in accordance with detailed, prescribed knowledge factors on environmental and social issues, which is a key attribute of the present regime, each on the stage of the monetary market participant and the monetary product. Regardless of the lack of knowledge, the brand new method seems extra comprehensible for buyers and in contact with current sustainable finance terminology. However it additionally comes with dangers. The usage of novel ideas, the precise scope of which must be decided in new delegated acts, opens the door to new gray areas and would seemingly result in all too acquainted requires supervisory clarifications in figuring out what sustainability (and now additionally, transition and ESG integration) truly means.
Arnaud Van Caenegem
Analysis fellow, KU Leuven
Legal professional, A&O Shearman LLP
