EC proposes major SFDR overhaul to simplify rules and curb greenwashing

Written by Adam Cadle

21/11/2025

The European Commission (EC) has proposed significant amendments to the Sustainable Finance Disclosure Regulation (SFDR), aiming to simplify the EU’s sustainable finance transparency framework.

The proposals follow a comprehensive review, which found that the current SFDR framework has led to disclosures that are too long, overly technical, and difficult to navigate.

The EC concluded that SFDR has, in practice, been used as a “de facto labelling regime”, creating confusion and increasing the risk of greenwashing and mis-selling.

As a result, the regulation has not fully achieved its goal of helping the financial sector channel capital towards Europe’s sustainability priorities.

Under the proposed reforms, the EC will scrap entity-level disclosure requirements on principal adverse impacts for most financial market participants, citing overlaps with the Corporate Sustainability Reporting Directive (CSRD) and high implementation costs.

Only the largest firms already within the CSRD’s updated thresholds will be required to disclose their environmental and social impacts.

This change is expected to substantially reduce reporting burdens and eliminate duplication across the EU’s sustainability framework.

Product-level disclosures would also be streamlined, with a sharper focus on comparable, meaningful sustainability information aligned with the Commission's proposed new product categories.

Disclosures would be shorter, clearer and more retail-friendly, allowing investors to more easily understand how a product’s sustainability strategy works in practice.

The commission believes the changes will reduce compliance costs while strengthening the EU’s position as a global leader in sustainable finance.

A central feature of the proposal is the introduction of a simplified, three-tier categorisation system for financial products making environmental, social and governance (ESG) claims.

The “sustainable” category would include products investing in assets already aligned with high sustainability standards; the “transition” category would cover products directing capital toward companies not yet sustainable but on a credible transition pathway; and the “ESG basics” category would encompass products that integrate ESG factors but do not meet the threshold for the other two categories.

All categorised products would be required to ensure at least 70% of their portfolio supports the stated sustainability strategy and to exclude investments in harmful industries, including companies that violate human rights standards, or that are involved in tobacco, prohibited weapons, or fossil fuels above specified limits.

Indeed, only products meeting category criteria would be permitted to use ESG-related claims in names or marketing materials - an attempt to curb greenwashing and restore investor trust.

The EC said the simplified regime will help retail investors navigate sustainable investment options more effectively, while strengthening the competitiveness of the EU financial sector and supporting the broader objectives of the Savings and Investments Union by encouraging greater retail participation in capital markets.

The proposal will not go to the European Parliament and Council for consideration.

The review follows a recent European Parliament vote to reduce sustainability reporting duties and due diligence requirements for companies, a move welcomed by the insurance and pension industry.

Related Articles