The European Commission has unveiled a sweeping overhaul of the EU’s Sustainable Finance Disclosure Regulation (SFDR), aiming to fix a system critics say became too complex, costly, and confusing for investors and financial institutions. Instead of functioning purely as a transparency framework, SFDR had turned into a de facto fund labelling regime centered on the familiar Article 8 and 9 classifications, driving misaligned expectations and greenwashing risk.

At the heart of the reform is a new three-tier product categorization for any fund making ESG claims: “Sustainable,” “Transition,” and “ESG Basics.” Sustainable products must invest primarily in assets already meeting high environmental or social standards. Transition products target companies and projects that are not yet sustainable but are on credible decarbonization or social-improvement pathways. ESG Basics products integrate ESG considerations but don’t meet the stricter criteria of the other two categories. All three will be subject to exclusions, such as companies with serious human-rights violations, and tighter limits on fossil-fuel exposure, with sustainable funds facing the toughest restrictions.

Across categories, at least 70% of a product’s portfolio must follow the stated ESG strategy. Funds using ESG or sustainability terms in their names or marketing will need to demonstrate alignment with the chosen category and screen out “most harmful” activities. The Commission’s goal is to give retail investors shorter, clearer and more comparable information about what a fund actually does, while restoring trust in ESG labels.

On the reporting side, the proposal removes most entity-level Principal Adverse Impact (PAI) disclosures for financial market participants, instead relying on corporate reporting under the Corporate Sustainability Reporting Directive (CSRD) for large players. Product-level templates would also be slimmed down to focus on data that is “available, comparable, and meaningful,” easing compliance burdens for asset managers and pension providers. Investor groups broadly welcome the clarity and transition category but warn that scrapping PAIs and many entity-level requirements may weaken consistency and long-term accountability.

The package now moves into negotiations with the European Parliament and member states. If adopted, it would mark the biggest reset of EU sustainable finance rules since SFDR came into force in 2021, repositioning the regime around simple labels, product integrity, and retail usability, rather than dense disclosures and regulatory complexity.

Source:

https://esgnews.com/commission-moves-to-simplify-eu-sustainable-finance-rules/

https://onestopesg.com/esg-news/eu-commission-unveils-overhaul-of-sfdr-introducing-new-sustainable-and-transition-investment-categories-1763653539130