The European Commission has proposed a major overhaul of its Sustainable Finance Disclosure Regulation (SFDR). The move is designed to simplify the framework for investors and strengthen the fight against greenwashing in the financial sector.
The amendments, proposed on November 20, 2025, introduce a new, clear categorization system for sustainable financial products. This will help retail and institutional investors to align their investments with their sustainability preferences.
The new three-tier categorization system:
The proposal outlines three dedicated, voluntary product categories for financial products making ESG claims:
Sustainable: Products must contribute to clear sustainability goals (e.g., climate, environment, or social) by investing in companies or projects that already meet high sustainability standards.
Transition: Products are designed to channel investments toward companies and/or projects that are not yet sustainable but are on a “credible transition path” or that aim to achieve measurable improvements in climate or social areas.
ESG basics: This is for other products that integrate various ESG approaches but do not meet the stringent criteria of the first two categories.
Criteria for the new categories:
To qualify for any of the new categories, a product must ensure that at least 70% of its portfolio supports the chosen sustainability strategy.
The Commission noted that the current SFDR classifications (Articles 8 and 9) were being used as de facto sustainability labels, often confusing investors regarding a product’s true environmental or social ambition.
The new rules directly address this by eliminating the complex disclosure requirements and replacing them with a simplified, product-focused labeling system, which aims to improve comparability and trust.
Furthermore, the ‘Sustainable’ and ‘Transition’ categories include new, explicit exclusion criteria, such as a ban on investing in companies that are expanding their fossil fuel activities. A key anti-greenwashing measure is that the use of ESG-related claims in a product’s name or marketing will now be reserved exclusively for these new, officially categorised products.
Simplified disclosure for financial markets:
In addition to the new labels, the Commission aims to cut compliance costs and administrative burdens for financial market participants.
The proposal includes a significant reduction in overall disclosure requirements, including the deletion of complex entity-level disclosures for most firms. The strategic shift focuses the SFDR strictly on product transparency, ensuring that information provided to investors is more concise, comparable, and relevant.
