Simplifications announced for SFDR
Issue 140 l Eka’s Weekly Roundup (23 November 2025)
Earlier this week (Nov 20th), the European Commission announced simplifications to its Sustainable Finance Disclosure Regulation (SFDR) regime announced in Nov ‘19 (implemented in Mar ‘21).
The reason for these changes are twofold: 1) making it easier for retail investors to understand financial products as the SFDR regime had been used de facto as a labelling system, and 2) to simplify reporting for investors to better understand and compare financial products.
The key changes announced last week include (1) simplified disclosures & (2) a clear categorisation system. Read on to understand these changes in more detail.
Refreshed rules look to improve understandability of financial products sustainability claims 🗞️
Recap on SFDR - what is it, since when?
SFDR was introduced in 2021 as part of an EU package of sustainability disclosure rules for financial markets designed to help deliver on the objectives of the Green Deal. Other similar initiatives enacted around this time include (1) the Taxonomy Regulation and (2) the Corporate Sustainability Reporting Directive.
The aim of SFDR was to set out how financial market participants should disclose sustainability information to investors, to help them make better choices about their investments and how sustainable these were.
The European Commission has been collecting stakeholder feedback which suggested that investors have found it difficult to use the SFDR disclosures to take better informa. These shortcomings have led to challenges and undue costs for financial market participants in applying the rules, and to difficulties for investors to understand and compare ESG products amid confusion over the unintended and misleading use of the SFDR disclosures as de facto product labels, but without common criteria fit for this purpose. The problems lead to risks for investor protection, the efficient functioning of the single market, and the competitiveness of the EU financial sector.
Change 1: Simplified Disclosures
The Commission is proposing two changes under simplified disclosure:
To delete entity-level disclosure requirements around principal adverse impact indicators (PAIs). This would harmonise the reporting between the Corporate Sustainability Reporting Directive (CSRD) and the SFDR regime. This will reduce reporting requirements, costs, and duplication of reporting.
To significantly reduce the requirement of product-level disclosures. These are reduced to reporting data which is ‘available, comparable, and meaningful’. There is also significant mention of ensuring these disclosures are retail friendly and optimised for readability and understandability.
Change 2: Clearer Categories
There are three new categories for financial products making ESG claims. They fall into the following buckets:
Sustainable category: products contributing to sustainability goals (e.g. climate, environment or social goals), such as investments in companies or projects that are already meeting high sustainability standards,
Transition category: products channeling investments towards companies and/or projects that are not yet sustainable, but that are on a credible transition path, or investments that contribute toward improvements in e.g. climate, environment or social areas,
ESG basics category: other products that integrate a variety of ESG investment approaches but do not meet the criteria of the above-mentioned sustainable or transition investment categories (e.g. focusing on best-in-class performers on a given ESG metric, pursuing financial returns while excluding the worst ESG performers).
Products would need to ensure that >70% of their portfolios supports the chosen bucket, and exclude al their investments in harmful industries and activities. To our eyes, these categorisations more closely mirror the UK’s SDR regime.