Questions and answers on the Sustainable Finance Disclosure Regulation

Why has the Commission proposed a review of the Sustainable Finance Disclosure Regulation (SFDR)?

The Commission communicated its intention to review the framework in December 2022, and subsequently carried out a comprehensive assessment that included two stakeholder consultations. In this process, the Commission 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 mis-use 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. As a result, the Commission concluded that the framework has not been fully effective in delivering on its broad aim to improve transparency and help mobilise private funds towards diverse sustainability aims.

What are the key elements in today's revised SFDR?

The key elements in today's proposal are:

• 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 categorisation system with three categories: Based on extensive stakeholders' feedback, the Commission is proposing three voluntary categories (see question 3) that build on existing market practices. The key objective is to bring clarity to investors regarding products that have a level of sustainability-related ambition, enabling them to match their investments with their sustainability preferences. Most importantly, the categories are simpler, clearer, and less data-intensive than the current concepts of the SFDR. 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.

How are the new categories going to work in practice?

The categories will effectively cluster ESG (environmental, social and governance) financial products into three groups depending on their ESG objectives and levels of ambition. The three groups are the following:

1. Sustainable category: products contributing to sustainability goals (e.g. climate, environment or social goals), such as investments in companies or projects that are already meeting high sustainability standards;
2. Transition category: products making investments in companies and/or projects that are not yet sustainable, but that are on a credible transition path, or investments that contribute toward improvements in e.g. climate, environment or social areas;
3. ESG basics category: other products that integrate a variety of ESG investment approaches but do not meet the criteria of the sustainable or transition investment categories (e.g. focusing on best-in-class performers on a given ESG metric, pursuing financial returns while excluding the worst ESG performers).

The new categorisation system reflects current market practices and builds on the existing legislative framework (including the ESMA Guidelines on funds' names and the Commission 2023 Recommendation on transition finance). In addition, it deletes the definition of ‘sustainable investment' under the SFDR, which had given rise to diverse interpretations and implementation challenges in practice. Instead, the new framework embeds the concept in simpler form in clear criteria and allows market participants to continue making use of practices that they have developed. Furthermore, the third category can potentially include a large majority of the ESG products currently in the market.

With the new system, the investment journey is made easier as investors are better equipped to understand financial products making ESG claims. In addition, they will have a clearer understanding of the sustainability objectives and the level of ambition of different products. This will allow better comparability amongst ESG products within the same category and across different categories, also resulting in a higher level of investor protection compared to the current situation.

What are the criteria that need to be met by financial products under each of the categories?

The categories function based on two main criteria:

1) Exclusions, meaning that products cannot invest in certain industries or activities that are considered incompatible with the category, and 2) Positive contribution, meaning that a minimum portion of 70% of the portfolio must follow an ESG strategy that matches the claims made by the product;

The three categories would integrate these as follows.

• Sustainable category: (1) exclusion of investments into companies involved in tobacco or prohibited weapons, or found in violation of human rights, or active in fossil fuels or high-emitting energy activities, or expanding their fossil fuel activities; (2) 70% of the portfolio to align with the strategy of the product for positive contribution to sustainability. The assessment of performance against the objective should be monitored and disclosed and should be based on appropriate indicators chosen by the FMPs, and any principal adverse impacts on environmental or social factors should be identified and clearly disclosed, together with any actions taken to address them.
• Transition category: (1) exclusion of companies involved in tobacco or controversial weapons, or found in violation of human rights as well as those generating significant revenues from coal or expanding their fossil fuel activities; (2) 70% of the portfolio to align with the strategy of the product to demonstrate positive contribution to the transition towards more sustainable practices. The assessment of performance against the objective should be monitored and disclosed and should be based on appropriate indicators chosen by the FMPs, and any principal adverse impacts on environmental or social factors should be identified and clearly disclosed, together with any actions taken to address them.
• ESG basics category: (1) the same social exclusions as for the transition category above apply, as well as an exclusion of companies generating significant revenues from coal; (2) 70% of the portfolio to align with the overall strategy for integrating ESG factors. The assessment of performance against the objective should be monitored and disclosed based on appropriate indicators chosen by the FMPs.

The Commission will be empowered to develop a limited set of implementing rules to supplement these key elements with more technical requirements for the categories. This includes indicators for voluntary use by financial market participants, building on those in the existing SFDR implementing measures and in the evolving European Sustainability Reporting Standards, to help demonstrate compliance with the above criteria.

How does the revised SFDR support the Savings and Investments Union (SIU)?

The revised SFDR aligns with the SIU priorities and contributes to the broader efforts of improving the integration of the EU financial markets to support productive investments. More concretely the revised SFDR aims to:

(1) boost the integrity of the EU single market for sustainable finance by overcoming some of the fragmentation seen with the current rules and by fighting greenwashing in a more efficient way;

(2) lower administrative burdens on financial market participants;

(3) encourage greater retail participation in sustainable finance and a more efficient allocation of capital for Europe's sustainable prosperity;

(4) help to scale up private sustainable finance, as part of deeper, more integrated EU capital markets.

What are the expected benefits for EU investors?

The revised SFDR will facilitate the investment journey for investors, including retail investors, who wish to invest in sustainable products, and will strengthen the safeguards against greenwashing.

First, the new categorisation of products will make it easier for investors, as well as distributors, to understand financial products making ESG claims, by making the sustainability objectives and the level of ambition of different products clearer. As a result, it will be simpler for investors to find products with the level of sustainability ambition that match their preferences.

Second, EU investors will have access to shorter and more focused information. This will facilitate comparability between products, within the same category and across different categories.

Third, clear upfront exclusions coupled with transparency on all other details behind products will mitigate negative surprises for retail investors. In addition, only products complying with the criteria of the category will be allowed to make ESG claims in their names and marketing documents. This will help fight greenwashing and enhance the level of investors' protection and trust in ESG products.

The Commission will continue to monitor the market and envisages working with the ESAs and consumer associations on the implementation of the regime. This process will ensure that the categories, their accompanying streamlined disclosures and related rules for product distributors will improve consumers' ability to understand and compare ESG products and deliver credible ESG information to investors.

Is the framework going to be consumer-tested?

The Commission has analysed all existing studies and surveys on EU retail investors' sustainability objectives and related understanding of disclosures in its preparation of the SFDR amendments. Once co-legislators find an agreement, the resulting framework should be further consumer tested, with the purpose of informing in particular how product distributors identify the products that match investors' sustainability preferences based on the categories, and ensure that investor-facing information can be easily understood in different EU languages. The European Supervisory Authorities (ESAs), with the help of national supervisors, will be instrumental in this testing across EU Member States.

How are the elements of the revised SFDR going to help fight greenwashing?

The proposed amendments address the issues linked to the current disclosure obligations which have given rise to concerns of greenwashing and mis-selling of investment products. Notably, the two disclosure regimes under the current Articles 8 and 9 have been used as de facto sustainability labels, with no common criteria for investors to compare the relative ESG performances. This has led to confusion, especially among retail investors, who often assume that Article 9 funds are necessarily fully sustainable and that Article 8 funds strongly integrate ESG factors, even though this is not necessarily the case.

While the changes introduced with the categories imply a fewer number of topics covered in the disclosures, they will make the information on available ESG products more relevant and comparable for investors, helping to prevent both “greenwashing” and “green hushing” (a practice in which market operators under-report sustainability efforts due to a fear of being accused of greenwashing).

In addition, only products complying with the criteria of the categories will be able to make ESG claims in their names or in their marketing documents. This will ensure that any products making claims to their investors are complying with EU minimum standards, therefore fighting greenwashing and reinforcing trust in ESG financial products.

The ESAs, together with the national competent authorities (NCAs), are already monitoring the occurrences of greenwashing and supervising sustainability-related claims. Their 2023 and 2024 reports assess which areas of the sustainable investment value chain are more exposed to the risk of greenwashing. The Commission will continue working with the ESAs, including to help assess the effectiveness of the future SFDR as a tool against greenwashing.

What are the benefits for other market participants?

Financial market participants such as asset managers under the scope of the Regulation will benefit from reduced disclosure requirements both at entity-level and at product-level. The amended rules are less data intensive than the current SFDR requirements. This allows FMPs to focus on a reduced number of datapoints which are more relevant to their products. The proposal will also minimise gold-plating by national authorities and market fragmentation due to divergent requirements or expectations across the EU.

In turn, product distributors such as investment firms, banks and insurance brokers will also find it easier to ensure that investors are matched with products that suit their sustainability preferences. Overall, the proposal should facilitate the offer of sustainable products in financial markets, which will ultimately benefit investors as well as companies' access to sustainable and transition finance.

How are the new rules going to help financial market participants which might face difficulties accessing ESG data?

Compared to the existing framework, the revised rules will be simpler to apply and relying on fewer datapoints. Less information will have to be obtained and disclosed, involving data which is broadly available today and, according to various consumer studies, of most interest to investors. Besides this, financial market participants will have the possibility to rely on estimates where granular data is missing, obtained either from external data providers or generated in-house, with transparency toward investors on how this is done in practice.

External data providers themselves are outside the scope of the revised SFDR, which focuses on financial market participants and the financial products they offer. The appropriate regulatory treatment of external ESG data providers will be examined in the context of the review under the ESG Ratings Regulation.

What will happen with the current SFDR implementing measures and templates? Will they disappear entirely?

In line with the objective to reduce complexity and administrative burdens flowing from the EU financial services acquis, the proposal for a revised SFDR simplifies the framework also in respect of future implementing measures. This is consistent with the steps announced in this respect in early October 2025. The revised framework foresees only limited details being left for implementing rules, once the framework is agreed by co-legislators. These involve drawing up disclosure templates for categorised products (limited to two pages) and, for further precision and comparability, possible limited specifications to the investment approaches under the product categories. This would be done in tandem with the changes to implementing rules for how product distributors should consider the revised SFDR when identifying products that match investors' sustainability preferences.

How do the new rules help simplification and burden reduction?

The Commission proposal represents a major improvement towards simplification and burden reduction. First, it introduces simpler and clearer rules that reduce administrative burden linked to sustainability reporting, which in turn facilitates easier and more uniform enforcement. Second, setting up voluntary categories accompanied by a clear set of new criteria eases the implementation burden over time while ensuring a robust level of investor protection.

Taken together, the reduction in reporting, the avoidance of duplications, and the alignment to existing market practices through the new categorisation system will deliver a significant simplification of the framework.

For example, the removal of entity-level disclosures is expected to reduce annual disclosure costs for financial market participants by 25%, equivalent to €56 million in recurring annual savings. In addition, the reduction of product-level disclosures and the simplification through product categories are expected to further increase savings.

How do the new rules ensure coherence with the Omnibus simplifications for sustainability information from corporates?

The amendments proposed today reflect the Omnibus I and seek to eliminate any duplication with the Corporate Sustainability Reporting Directive (CSRD). The deletion of the entity-level disclosures is fully consistent with the changes introduced through the proposed Omnibus, in particular the future scope of corporate disclosures under the CSRD. In the future, only the largest Financial Market Participants, subject to the updated thresholds under the CSRD, will need to disclose their company-level impacts on the environment and society.

Also, the new categorisation system relies on fewer datapoints than the current rules and thus helps overcome data gaps, as SFDR disclosures are adapted to data which is available under the revised CSRD and from other sources or which can otherwise be reliably estimated.

How do the new rules ensure that the costs of implementation and market disruptions will be limited?

The new rules will remove any costs linked to entity-level disclosure and considerably reduce the costs associated with product-level disclosures. According to the Impact Assessment Report accompanying the amending Regulation, the proposed changes may entail limited initial one-off adjustment costs by FMPs that will be offset by the recurrent long-term savings achieved from the reduced disclosures.

For the new ESG product categorisation system, the rules are expected to be clearer, limiting gold-plating by national supervisors, and resulting in lower compliance costs linked to uncertainty and differences in national regimes. The criteria build on elements that are already being applied by a large portion of financial products (for example, all funds subject to the ESMA guidelines on funds names). As a consequence, the new categories are not expected to cause significant market disruption.

Finally, the amended rules are less data intensive than the current SFDR requirements. This allows FMPs to focus on a reduced number of datapoints which are more relevant to their products. It will also rely on data available from companies subject to the CSRD, following the modifications that will be brought by the omnibus proposals on sustainability or which can otherwise be reliably estimated.

Will the changes to the SFDR help boost investment in defence?

As the Commission has previously clarified, the EU sustainable finance framework places no impediments on private investments in the defence sector. This continues to be the case with the revised SFDR. The only exclusion concerning defence investments under the revised SFDR will be that categorised products would not be able to fund weapons prohibited in the majority of Member States, such as chemical and biological weapons.

Who did the Commission consult in preparing the proposal?

The Commission has undertaken extensive consultations with various stakeholders, including financial market participants, investor groups and associations, civil society, academics, national authorities and supervisors. Stakeholders were consulted both during the 2023 open and targeted consultations of the SFDR assessment, the call for evidence in spring 2025, as well as in continued bilateral and targeted engagement with experts from the financial industry, NGO/civil society and academics on the key elements of the proposal, including on how to set up product categories. Key input was also provided in the shape of reports from the European Supervisory Authorities and the Platform on Sustainable Finance, a Commission expert group.

The Commission has also taken into account feedback from the Member States Expert Group on Sustainable Finance and input from the study requested by the ECON Committee of the European Parliament on “the current implementation of the SFDR”.

To what extent does the revised framework rely on the EU Taxonomy and other tools in the EU sustainable finance framework?

The EU Taxonomy continues to play an important role in classifying environmentally sustainable economic activities and thereby helping guide investments by ESG financial products. Reflecting stakeholder feedback, the revised SFDR sets out that financial products can use the Taxonomy in a voluntary way, notably as one of the investment approaches under the transition and sustainable categories. Further, in order to encourage its use, products with 15% or more invested in Taxonomy-aligned assets are considered to meet the 70% positive contribution criterion in the sustainable and transition categories. These products would still need to apply the exclusions mandated under the category they wish to comply with on the portion of the portfolio that is not aligned with the EU Taxonomy, as well as the requirement to identify and disclose the adverse impacts their investments might have on other sustainability factors, and any actions taken to address them. The 15% threshold is based on findings by the Platform on Sustainable Finance suggesting this is a sufficiently ambitious threshold for current sustainable products, and also providing continuity by being attainable by about half of the current investment funds disclosing under Article 9 of the SFDR. The threshold would be reviewed in 3 years.

Likewise, the proposal also foresees special recognition for products replicating or managed in reference to the EU Climate Benchmarks i.e. Paris-aligned Benchmarks and Climate Transition Benchmarks. Those products will qualify under the sustainable and transition category respectively, without having to also check for compliance with the exclusions and without having to disclose the adverse impacts of their investments in each case.

What is the Commission proposing to amend in the Regulation on packaged retail and insurance-based investment products (PRIIPs)?

Packaged retail and insurance-based investment products (PRIIPs) offered to investors can include, among others, financial products covered by the SFDR such as investment funds or insurance-based investment products. In order to inform investors on whether PRIIPs that may be offered to them fall within a category under the revised SFDR, the proposal amends the PRIIPs Regulation by requiring disclosures in the key information document of PRIIPs indicating which category they fall under. More specifically, the existing general information requirement on whether a PRIIP invests in line with specific environmental or social objectives will be replaced by a more precise and structured information point to investors: a brief new heading in the key information document under which a PRIIP falling within a category under the revised SFDR would be required to mention this information.

What does the Commission envisage as next steps?

The Commission proposal will be now negotiated by the co-legislators. Subsequent implementing measures to determine specific details of the framework would be developed in a second step, including how the revised rules should be applied by distributors of financial products (investment firms, banks and insurance intermediaries), ensuring all pieces of the legal framework apply coherently and at the same time.

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