The European Commission is currently considering significant reforms to the Sustainable Finance Disclosure Regulation (SFDR) following criticism of its design and the identification of unintended consequences. This review, which is expected to lead to a radical reform of the SFDR, is well underway.<\/p>\n
When the European Commission adopted the SFDR in 2019, it aimed to increase transparency and reduce \u201cgreenwashing\u201d in the financial sector. It was a key measure in the EU\u2019s plan to transition to a net-zero emissions economy. However, SFDR was built on "unstable foundations"<\/strong>. The order of introduction of the obligations was criticized (disclosure for the financial sector came before disclosure for the real economy). The final version of the law, which differed significantly from the original draft, did not undergo a thorough cost-benefit analysis and was marked by uncertainty. The burden on the financial sector, including alternative investment managers, was significant regardless of whether the sponsor had a clear focus on \u201csustainable investing\u201d.<\/p>\n It quickly became apparent that the way the market used the differentiated disclosure obligations under Articles 6, 8 and 9 as de facto labels, in fact increased confusion<\/strong>, rather than addressing it, and in some areas exacerbating \u201cgreenwashing\u201d. In response, the European Commission launched a review in December 2022, less than two years after the law entered into force. The latest phase of this review included a call for evidence, which took place in May 2025 and recently concluded.<\/p>\n The responses to this call confirm that there is broad agreement on the need for reform, but very different views on how radical the reform should be<\/strong>The current policy climate is more focused on burden reduction than ESG disclosure. Alternative investment managers continue to argue for a more focused and simplified approach in most of their responses.<\/p>\n Some reforms seem relatively uncontroversial<\/strong>There is broad consensus (expressed, for example, in the AIMA response) on the need eliminate or significantly simplify the disclosure of information<\/strong>, which are considered redundant for investors\u2019 needs, such as \u2018entity-level\u2019 disclosures that provide information about an asset manager and its entire portfolio. Many argue that this information is not useful for investors who are primarily interested in data relating to the specific funds they hold. Similarly, there is a common push to reduce the administrative burden of the \u2018Principal Adverse Impact\u2019 (PAI) framework. Proposals include the introduction of a materiality qualifier and better alignment with corporate disclosure rules.<\/p>\n However, there are also key areas where there is no consensus<\/strong>. For example, some industry responses (including Invest Europe) call for the SFDR to retain its flexible disclosure-based nature. In this view, while the SFDR is imperfect, a radical move towards a stricter categorisation or labelling system would be too restrictive, particularly if it applied to funds designed only for institutional investors. This could hinder innovative and flexible investment strategies that channel capital into sustainable investments while continuing to attract capital from a global investor base. On the other hand, there are calls from other quarters \u2013 including some sustainability-focused industry associations \u2013 to a shift from simple disclosure to a formal regime of product categorization or labeling<\/strong>.<\/p>\n For firms considering how to categorize their next fund, it is currently difficult to gauge which direction the Commission will take. Will it follow earlier recommendations from influential groups such as the Platform for Sustainable Finance and strengthen the SFDR with some simplification reforms? Or will it \u201cread the mood\u201d and propose a simpler set of measures that focus primarily on burden reduction, as it did with the parallel but separate \u201csustainability omnibus\u201d package?<\/p>\n At this point, the Commission seems open to both options; this is evidenced by the fact that the call for evidence did not include specific questions, allowing respondents to present their views. Private equity markets have clearly articulated their demands for revised rules and have explained the issues specific to alternative investment managers that are not as problematic for public markets. It is not yet clear whether EU policymakers will follow these demands. However, it seems clear that we are still far from finalizing the ruleset<\/strong>Although the timing is uncertain, it is unlikely that any reforms will come into effect before 2028<\/strong>And when it comes to content, politics will inevitably play an important role in shaping their final form. 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