European Commission Proposes Simplified SFDR Framework Amendments to Streamline Disclosures

Following its review of the Sustainable Finance Disclosure Regulation, the European Commission has put forward targeted changes to the EU disclosure regime for financial products with environmental or social aims. The proposal seeks to simplify and streamline SFDR requirements, responding to concerns that current disclosures are overly complex and are not working well for retail investors or product providers.

On 20 November 2025, the European Commission issued a press release setting out a proposal to amend the Sustainable Finance Disclosure Regulation (SFDR). SFDR provides the EU transparency framework for financial products that integrate environmental or social aims. The Commission presents the amendments as a response to weaknesses in the current regime and as a way to make the rules simpler, more efficient and better aligned with market realities. The intention is to deliver disclosures that are easier for retail investors to use and more practical for companies.

The Commission’s review of SFDR indicates that existing disclosures have become lengthy and complex, limiting investors’ ability to understand and compare products on the basis of their environmental or social characteristics. The review also observes that SFDR has effectively operated as a de facto labelling system. This has contributed to confusion, especially among retail investors, and has increased the risk of greenwashing and mis-selling. In the Commission’s view, these factors have meant that SFDR has not fully achieved its purpose of supporting capital allocation towards Europe’s sustainable priorities.

Simplified Disclosures at Entity and Product Level

A key change in the proposal is the removal of entity-level disclosure obligations for Financial Market Participants (FMPs) in relation to principal adverse impacts indicators. The Commission links this step to the need to streamline corporate disclosures and to reduce overlaps between the Corporate Sustainability Reporting Directive (CSRD) and SFDR. It also reflects the Omnibus I simplification package adopted in February 2025. Under the revised approach, only the largest Financial Market Participants that meet the updated CSRD thresholds would be required to disclose their impacts on the environment and society. The press release notes that taking entity-level disclosures out of SFDR would cut reporting burdens and the costs of gathering ESG data across multiple topics, while eliminating duplication.

The Commission also proposes a substantial narrowing of product-level disclosures. These would focus on information that is available, comparable and meaningful for investors. By concentrating on criteria linked to the new product categories, the Commission expects disclosures to become clearer for providers and more consistent across the market, supporting comparability for retail investors.

Introduction of an ESG Product Categorisation System

In parallel with disclosure simplification, the Commission proposes a categorisation system for financial products that make ESG claims. Stakeholder feedback is cited as supporting a simpler structure with three categories and clear criteria, building on market practice and recent regulatory guidance. The Sustainable category would cover products that contribute to sustainability goals such as climate, environmental or social goals through investments in companies or projects already meeting high sustainability standards. The Transition category would apply to products that direct investment towards companies or projects not yet sustainable but on a credible transition path, or that contribute toward improvements in relevant areas. The ESG basics category would capture products using a range of ESG approaches that do not satisfy the Sustainable or Transition criteria.

For categorised products, the proposal requires that 70% of the portfolio supports the selected sustainability strategy. It also introduces exclusions for all portfolio investments in harmful industries and activities. Examples in the press release include companies in violation of human rights standards and those involved in tobacco, prohibited weapons and fossil fuels above certain limits. The Commission further states that ESG claims in product names and marketing documentation would be limited to products that fall within one of the categories.

Background and Legislative Process

SFDR was adopted in November 2019 and has been in application since March 2021. It is complemented by a Commission delegated regulation adopted in April 2022, which has applied since January 2023. The new proposal revises the disclosure framework, sets out the essential features of the ESG product categories and supervisory framework, and gives the Commission the power to develop a limited set of implementing rules to add technical requirements. The proposal will now move to the European Parliament and the Council for consideration.