This week, the European Commission announced its long-awaited proposals to amend SFDR – the EU’s flagship framework, introduced in 2021 to drive transparency and reduce greenwashing claims in sustainable finance. Lauded at the time for its groundbreaking ambition, SFDR regulations introduced a three-tier product classification – Article 6 (products that did not integrate sustainability considerations into their investment decisions), Article 8 (products promoting environmental or social characteristics) and Article 9 (products with sustainable investment as their core objective).
Although not intended as a labelling regime, they quickly became the de facto market standard, shaping product design, distribution and investor perceptions across the EU and beyond. However, in practice, the framework proved complex and difficult to navigate, leading to lengthy and highly technical disclosure obligations, that in some cases obscured rather than clarified the sustainability characteristics of investment products.
The EU’s New Proposals
The latest proposals, released on 20 November 20251, focus on two key elements:
1. Simplified Disclosures
- Entity-level: Entity-level disclosure requirements on Principal Adverse Impact (PAI) indicators (used to measure how investment decisions negatively affect sustainability factors) have been proposed to be removed entirely for Financial Market Participants. If enacted, this should significantly reduce the compliance burden, particularly for asset managers by minimising duplicative fund-level reporting.
- Product-level: Product-level disclosure requirements will equally be significantly reduced, limiting them to data that is ‘available, comparable and meaningful’ enhancing their relevancy and comparability for investors. This should help focus attention on what investors need to understand for the sustainability ambition and performance of a product - rather than a tick-box exercise in data collection.
2. A clear categorisation system
Perhaps the most transformative element of the reform is the overhaul of Article 6, 8 and 9 to a new three-tier categorisation system for financial products making environmental, social or governance claims, falling into:
- Sustainable category: Investments that already meet high sustainability standards, contributing directly to environmental or social goals.
- Transition category: Investments that support companies or projects on credible paths to sustainability - acknowledging that progress, not perfection, is vital to the transition economy.
- ESG basics category: Products that integrate ESG factors without meeting the criteria for the other two categories, such as those using best-in-class or exclusionary approaches.
Each category will require at least 70% of investments to align with its stated sustainability strategy and will exclude exposure to harmful sectors such as tobacco, prohibited weapons, or companies violating human rights. Importantly, ESG terminology in product names and marketing will be reserved for categorised products, with the aim of creating a more trustworthy marketplace and helping to counter greenwashing.
Investor Confidence, Market Efficiency, and the Path Forward
The new categorisations align with EU efforts to reduce reporting burdens through Omnibus proposal, as well as wider global trends: frameworks such as the UK’s Sustainability Disclosure Requirements (SDR) and the US Securities and Exchange Commission’s (SEC) fund labelling rules are similarly converging around simpler, more credible sustainability labels.
“the direction is clear: the next phase of Europe’s sustainable finance architecture will be simpler, sharper, and more accessible” – Tom Owen
The reduction of reporting burdens should enable asset managers to focus their efforts on supporting real-world outcomes. “Without clear linkages to decision-making or capital allocation, much of today’s entity-level reporting feels like disclosure for disclosure’s sake. The new proposals are welcomed, and we hope to see this incorporated within broader regulatory reporting in the UK” commented Rowan Buchanan, Jupiter’s Corporate Sustainability Manager.
The proposals will now be deliberated by the European Parliament and Council. While the legislative process will take time and may only take effect in 2027. “Having learnt from the pitfalls of overcomplexity, the direction is clear: the next phase of Europe’s sustainable finance architecture will be simpler, sharper, and more accessible. For asset managers, the new proposals represent a chance to integrate sustainability in a way that is both compliant and commercially coherent, while for investors, the simplification should enable clearer comparisons and stronger alignment between intent and impact” commented Tom Owen, Jupiter’s Head of Legal.
Footnotes
1Commission simplifies transparency rules for sustainable financial products
2Questions and answers on the Sustainable Finance Disclosure Regulation
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