The continuing delay to the finalisation of the Sustainable Finance Disclosure Regulation (SFDR) comes as little surprise. With dissent from across the investment industry, and even from within the European Commission, it’s been clear for some time that the current framework is struggling to meet its intended objectives. The ESAs, member states, and private stakeholders have all weighed in with recommendations. Now, with final inputs submitted and the Commission signalling it won’t seek further consultation, the contours of what SFDR 2.0 might look like are coming into view.
A framework in flux
The headline issue is not simply delay, but direction. The criticism voiced by EU Commissioner Maria Luís Albuquerque, describing SFDR as “not fit for use by EU investors,” has added fuel to the debate over whether SFDR should be scrapped and rewritten entirely. Her concern that the framework fosters confusion, greenwashing, and market distortion echoes feedback across industry bodies. For fund managers and investors alike, the inconsistencies and interpretive burden have made compliance a headache and trust difficult to maintain.
Among the most likely revisions is a reduction of the sustainable asset allocation threshold from 90% to 80%. This adjustment would make the framework more compatible with fund liquidity needs and align it more closely with the UK’s Sustainability Disclosure Requirements (SDR). Under the current rules, the high threshold limits a fund’s ability to hold cash or necessary non-sustainable assets, creating inflexibility that benefits neither investors nor sustainability outcomes.
Equally pressing is the call for an EU-wide labelling system akin to the UK’s SDR. A label-based approach could help clarify what it means for a product to be sustainable, reducing the risk of misinterpretation and giving investors a clearer picture of what they’re buying into. Currently, disclosure obligations often feel like an exercise in compliance box-ticking rather than a meaningful communication tool.
See also: Most asset managers still missing the mark on SFDR engagement disclosures
Greenwashing and the need for clarity
One of the sharpest critiques from the industry has been around inconsistent disclosure practices. Fund managers are either over-disclosing or under-disclosing due to the lack of clear enforcement or fear of reputational damage. The administrative burden of reclassifying entire product suites has only compounded the issue. What’s needed is a sharper definition of greenwashing, coupled with proportionate sanctions. Without them, investor trust will remain brittle.
Simplification of the Principal Adverse Impact indicators and reconsideration of the “do no significant harm” test are also on the table. Both have proven difficult to implement in practice and have been criticised as overly academic. There is strong support for streamlining these concepts and providing fund managers with more flexibility, especially where the underlying data is scarce or patchy.
Improving accessibility and investor relevance
Another emerging theme is accessibility. SFDR disclosures are often overly technical, offering little value to the average retail investor. One possible improvement would be to integrate ESG characteristics into more digestible formats, such as the PRIIPs Key Information Document (KID). Making sustainability metrics understandable and actionable is essential if the framework is to fulfil its purpose.
The risk of losing sustainable funds entirely is real. As we’ve seen before with ethical funds, which faded from prominence due to rigid exclusion criteria and investor fatigue, overregulation could spell the same fate for ESG products. SFDR must evolve to ensure sustainability classifications are flexible and future-proof. If the regime becomes too prescriptive, it risks choking innovation just when it’s most needed.
The year ahead
With the consultation period now closed and no further calls for input anticipated, all eyes are on Q4 2025, when the Commission is expected to publish its proposal. This will likely tie in with the broader Omnibus regulatory efforts aimed at streamlining sustainability reporting. If the Commission takes this opportunity to implement pragmatic, investor-focused reforms, the revised SFDR could emerge as a more workable and trusted foundation for sustainable finance in the EU.
If not, we risk an outcome where well-intentioned regulation fails to serve either investors or the planet. If an extra six months delivers a simpler, more effective rulebook, the wait will have been worth it.
