Investment commentators have largely welcomed the sweeping changes in last week’s SFDR draft proposal with “significant improvements” outlined for the disclosure framework and a new category system announced.
The European Commission released the draft proposals of an updated Sustainable Finance Disclosure Regulation (SFDR) on 19 November – following a leak earlier in the month. A consultation had begun in 2023 as it came to light a number of Article 8/9 funds – considered to be ‘greener’ by the market – were actually flagging greenwashing concerns.
In a statement, the Commission said the consultation process had identified several shortcomings. “In particular, the current disclosure requirements regarding sustainability features of financial products are long, complex and difficult for investors to understand and compare. Moreover, the misuse of the disclosure requirements under Articles 8 and 9 of the SFDR as de facto product categories has led to concerns of greenwashing and mis-selling of products. Financial market participants have also struggled to cope with the length and complexity of disclosure requirements, experiencing undue burdens and costs.”
See also: What comes next for SFDR: Final recommendations and a future in the balance
As a result, it has proposed a series of revisions to SFDR including:
- Removal of entity-level disclosures: the requirement for Financial Market Participants (FMPs) to publish and maintain on their website where they consider principal adverse impacts of investment decisions on sustainability factors is deleted, including the corresponding templates. Until now, FMPs with more than 500 employees had to provide this information.
- Significant reduction of the product-level disclosures: information towards investors is shortened and simplified. For example, the number of topics covered in disclosure templates will be reduced. Moreover, disclosures will be coherent with the new product categories and rely on clear, measurable and usable concepts.
- Introduction of a three-category system: these are transition (Article 7), ESG basics (Article 8), and a sustainable category (Article 9). Minimum criteria and exclusions vary, with the most stringent ones for the sustainable category (notably the full list of PAB exclusions and new fossil fuel projects) and much weaker ones for the ESG basics category.
The Commission further explained the “complex disclosure requirements under Articles 8 and 9 of the SFDR are deleted”.
“These had caused significant uncertainty and issues of mis-selling and misuse of disclosures as labels. ESG claims made in names and marketing documents will now strictly be reserved for categorised products, ensuring that any products sold as ESG comply with common EU minimum criteria.”
Helen Slater, regulatory manager at FE fundinfo, said the proposal signals a “meaningful step” in the Commission’s efforts to reshape the EU’s sustainable finance framework.
“By setting out a simpler set of product categories and a more accessible disclosure approach, the amendments aim to bring greater clarity to an area that has often felt difficult for firms and investors to navigate. The stronger focus on retail understanding marks a noticeable shift, reflecting a push towards disclosures that are easier to interpret and compare.
“As the Commission moves towards shorter and more focused disclosures, the attention naturally shifts to how firms evidence the sustainability characteristics they present. This creates an important moment for firms to understand how their existing products would sit within the proposed structure and to consider whether their underlying data and methodologies are positioned to support those claims.”
See also: Europe’s sustainable finance crossroads: Will SFDR 2.0 close the transparency gap?
Other commentators flagged the similarities with the Financial Conduct Authority’s Sustainability Disclosure Requirements (SDR) with Eleanor Fraser-Smith, head of sustainability at Victory Hill Capital Partners, saying this was a shift that felt inevitable.
“UK SDR regime was so well received and the push back on the wider regulatory regime and requests for simplification. The EU’s approach is still more prescriptive though, particularly through its link to the Paris Aligned Benchmark exclusions, the EU Taxonomy and the climate benchmark framework. That level of prescription will continue to create challenges for globally invested portfolios that are trying to align with multiple national transition plans, not just the EU Green Deal.
“The move to a clearer SFDR labelling system is sensible. SFDR was already being treated as a de facto label, but without the supporting criteria, which led to inconsistent interpretations of Articles 8 and 9 across the market. Introducing defined categories, and anchoring them more firmly in the EU Taxonomy, should give both investors and managers a clearer and more consistent basis for understanding product positioning.
“The introduction of a dedicated transition category is especially important. A key gap in the original framework was the lack of recognition for products supporting the transition of the wider economy, rather than only assets that already appear green from the outset. Bringing this into the regime is more reflective of how real economy decarbonisation actually occurs.”
Phil Spyropoulos, partner, financial services, at Eversheds Sutherland, added: “The official draft published today has certainly caught the industry’s attention. SFDR 2.0 is not just a tweak, it changes both the scope and the substance of the regime. This is a major facelift. If imitation is flattery, then the FCA should be blushing – the similarities with the UK’s SDR are striking. For EU firms, that alignment is welcome news, as it strengthens the case for equivalence under the UK Overseas Funds Regime.
“That said, the UK SDR remains a tough standard in practice, largely because of the rigor of the FCA’s application process. We’ll need more clarity on some shortcuts in the rules, such as how alignment with the EU Taxonomy seems to cut through certain requirements. And while the leaks earlier this month were broadly accurate, some firms will be disappointed that the opt-out for institutional-only products didn’t make it into the final draft.”
Carol Thomas, head of sustainability and responsible investments at the Investment Association (IA), said the body welcomed the move to a disclosure-only regime and with clearer product categorisation but also had a warning: “Replacing the current Article 6, 8, and 9 framework with three new product categories, alongside minimum standards, will provide greater clarity for investors and improve consistency across the EU’s sustainable finance architecture.
“This approach also enhances alignment with other frameworks, notably the UK’s SDR regime. However, much of the detail remains to be defined. We urge caution on imposing strict naming and marketing rules that fail to reflect how funds are marketed in practice.”
‘Risk of greenwashing remains high’
However, ShareAction said the Commission had taken a “dangerous step backwards” with the EU’s main tool for improving sustainability transparency in the financial sector.
“This proposal is another dangerous step backwards for Europe’s sustainability agenda, effectively throwing another crucial law under the deregulation bus. Instead of fixing the weaknesses of the current SFDR, the Commission has stripped away key safeguards that help investors and consumers understand the real-world impact of their investments.
“Without the disclosure requirements on how financial institutions affect people and the planet, investors and consumers are left in the dark, without the information needed to steer capital towards investments that genuinely support environmental and social goals.
“Engagement, a standard practice investors use to press companies to reduce the harm associated with their investments, has also been neglected. Making it optional for only one product category, and ignoring it for all others, is short-sighted and slows down the transition to a more sustainable economy.
“The new ‘transition’ category could have been a real game changer. Excluding fossil fuel developers is a step in the right direction and clearly acknowledges that companies expanding fossil fuels cannot be labelled as transitioning. But given its loose requirements and major gaps across the rest of the framework, the risk of greenwashing remains high unless more stringent criteria are put in place.
“Europe needs consistent leadership on climate and sustainability, yet this proposal weakens the SFDR framework, fails to protect investors and consumers, and risks undermining the EU’s credibility on the global stage.
“Therefore, we call on the EU to restore effective entity-level reporting, mandatory stewardship requirements, and robust criteria to ensure the financial system truly supports a fair and sustainable transition.”
The proposals will now go through the legislative negotiation process but FE fundindfo’s Slater said asset managers can get to work now:
“Although the proposals will evolve through the legislative process, firms can begin preparing now by assessing whether their governance, data processes and product narratives are ready for a more consistent and comparable regime,” she said.
See also: Q&A with Lloyds’ Simons: SFDR has raised the bar for asset managers
This article first appeared on Portfolio Adviser
