On 20 November 2025, the European Commission published its long-awaited proposal to overhaul the SFDR regime (Regulation on Sustainability-related Disclosures in the Financial Services Sector). This far-reaching reform is responding to identified shortcomings in the existing SFDR framework, with its main objective being simplify and reduce administrative burden associated with sustainability disclosure. The proposal also significantly strengthens the ability of end-investors compare and understand financial products related to sustainability.

Key changes in the framework proposal

The proposal comes with several fundamental changes. The most significant ones include the introduction of voluntary product categorisation regime „"sustainability-related", which includes three new categories. In addition, all mandatory disclosure obligations related to the EU taxonomy are removed, as well as all disclosure obligations on principal adverse impacts (PAIs) and remuneration at entity level. It was also removed the term "sustainable investments"„ from the entire framework. The reforms will not apply to closed-end funds that were created and distributed before their introduction.

The Commission also proposes to simplify and shorten the templates for pre-contractual and regular reports, which will have maximum two pages. It is important to note that the proposal does not change existing obligations regarding the disclosure of sustainability risks.

Three new sustainability categories

The proposed regime introduces three categories: (i) a transitional category, (ii) a core ESG category and (iii) a sustainable category. The Commission notes that not all funds currently marketed under Article 8 or 9 of the SFDR, will automatically meet the criteria for new categories and some increase in their ambition may be necessary.

1. Sustainable category: This category is intended for products that already meet high sustainability standards and contribute to clear and measurable environmental or social objectives. These products must invest at least 70 % into assets that have such a measurable sustainable goal. Examples include investments aligned with the EU taxonomy or in EU green bonds. These funds must identify and disclose the main adverse impacts their investments. They are limited by strict exclusions: they are not allowed to invest in companies dealing in tobacco, controversial weapons, human rights violations, and they are also companies operating in fossil fuels or high-emissions energy sectors excluded. For instruments for the use of proceeds issued by these excluded issuers no exceptions are available. This category can be used by funds implementing an impact strategy.
2. Transitional category: It is intended for products investing in companies and/or projects that are not yet sustainable, but are on a credible path to transformation or contribute to it. Similarly, it requires a minimum investment of 70 % in transition-related assets. This includes investments in businesses with a credible transition plan or scientifically based goals. Similar to the sustainable category, the transition category must identify and disclose the main adverse impacts. The exclusion criteria are a bit more flexible – while tobacco, controversial weapons and human rights abuses are excluded, an exemption is provided for certain instruments to use the proceeds of otherwise excluded issuers. It can also be used for funds implementing an impact strategy.
3. ESG Basics Category: This category is for products that integrate sustainability factors beyond risk management considerations, but do not meet the stricter criteria of the sustainability or transition categories. Requires at least 70 % investment in assets integrating sustainability factors. This includes, for example, investing with an ESG rating that outperforms the reference benchmark. Funds in this category cannot be funds implementing an impact strategy. Exclusions include tobacco, controversial weapons and human rights abuses, with an exemption provided for certain revenue-use instruments.

Implications for uncategorized funds and investors

Financial products that do not want to be included in any of these categories will remain uncategorized. These funds may include limited disclosures about the consideration of sustainability factors in pre-contractual disclosures, but only provided that such information they are not their "central element"„. Uncategorized entities also will not be able to make any sustainability claims in their marketing communications, nor in the PRIIPS KID/UCITS KIID. Existing requirements for integrating sustainability risk into the investment process continue to apply to uncategorized funds.

The European Commission has confirmed that the „sustainability preference“ frameworks under MiFID II and IDD will be updated to align with the new SFDR categorisation system. The aim is to help investors find products, that exactly match their sustainability preferences.

The proposal is now entering the scrutiny phase of the European Parliament and the Council of the EU. Only after the trilogue negotiations is it expected that the revised framework will be applied. at the earliest from the end of 2027/2028. JRi

Given the complexity of the new SFDR regime, which moves from the existing dual system (Articles 8 and 9) to a three-category voluntary system with strict investment thresholds and exclusions, we can think of this change as an update to the rules of the road. Previously, we had only two speed classes (Articles 8 and 9), which were unclear and led to greenwashing. Now we have three clearly defined lanes – Slow Lane (ESG Fundamentals), Transition Lane (Transition Category) and Fast Lane (Sustainable Category) – with very specific technical requirements and minimum speeds (70 % investment threshold) ensuring that each vehicle (fund) clearly communicates its level of ambition to investors.