Introduction

The European Commission has unveiled a proposal to overhaul the Sustainable Finance Disclosure Regulation (SFDR), aiming to simplify the regime. The changes, published on 20 November and accompanied by a detailed Q&A and press release, form part of the Commission’s broader Savings and Investments Union agenda which aims to enhance financial opportunities for EU citizens and businesses, while supporting the EU’s economic growth and combativeness..

The Commission’s review seeks to address the structural weaknesses that have emerged since the SFDR entered into application. Stakeholders have repeatedly noted that although the framework was designed to promote transparency, it has in practice generated uncertainty around product categorisation and inconsistent disclosure practices. This feedback has informed the Commission’s reassessment of how sustainability information should be defined, classified, and communicated, providing the basis for the legislative reforms summarised below.

Background Summary

The proposal responds to widespread evidence that SFDR disclosures have become overly technical, difficult to compare, and have inadvertently created a labelling system. In particular, the market relied heavily on the distinction between “Article 8” and “Article 9” products, even though these provisions were never intended to function as labels. For example, Article 8 funds were widely described as “light green” products because they promoted environmental or social characteristics, while Article 9 funds were branded “dark green”, reflecting an expectation that they pursued sustainability objectives. This informal categorization produced inconsistent market practices and contributed to recurring greenwashing concerns.

Accordingly, the Commission proposes new sustainability categories for financial products to replace the current Article 8 (“light green”) and Article 9 (“dark green”) categories with three product categories that offer distinguishable strategies to investors. The “sustainable” category includes products that invest at least 70 percent of their portfolio according to a pre-defined sustainability strategy. Financial products in the “transition” category must include at least 70 percent of their assets in projects that are credibly on the path to sustainability. In the “ESG basics” category, at least 70 percent of assets are invested in other products that take various ESG investment approaches into account but do not meet the criteria of the categories. Principal Adverse Impacts (PAIs) must be disclosed under all three categories and investment exclusion conditions for weapons, tobacco, or fossil fuels apply, however, to differing degrees. Moreover, the proposal adjusts the scope of the SFDR and simplifies entity-level disclosure requirements by deleting Articles 4 and 5, which govern the provisions on entity-level disclosures of PAIs, aligning remuneration policies with sustainability risks. Removing these specific firm-level impact and remuneration disclosures is intended to avoid duplication with the broader sustainability reporting already required for large companies under the CSRD

A new categorisation framework

Following the high-level summary above, the Commission’s proposal can be examined in detail, beginning with its plan to replace the existing Article 8/9 distinction with a new product categorisation framework.

The Commission proposes to remove the Article 8/9 framework and introduce three core categories of sustainability-related financial products:

  • Sustainable – products investing mainly in assets with clear and measurable sustainability objectives.
  • Transition – products investing in companies or projects that are not yet sustainable but are on a credible transition pathway.
    ESG Basics – products integrating sustainability factors into their investment strategy beyond mere risk-integration, but without meeting the criteria for the two higher-ambition categories.

All three categories would be subject to a mandatory minimum investment threshold: at least 70% of the portfolio must be invested according to the sustainability strategy the product claims. Each category also comes with mandatory exclusions, but the exclusions differ between categories (for example, all categories exclude controversial weapons and tobacco, while Transition and Sustainable products face broader fossil-fuel exclusions).

The proposal also retains the concept of principal adverse impacts (PAI) at product level for Transition and Sustainable products but removes the existing definition of “sustainable investments” and the standalone “do no significant harm” (DNSH) principle, embedding these concepts indirectly through the new category criteria.

Streamlined, but still mandatory, disclosures

The current SFDR regime requires lengthy and highly technical disclosures for both ESG and non-ESG products. 

Under the proposal:

  • Categorised products (Sustainable, Transition, ESG Basics) must provide pre-contractual, website and periodic disclosures, but in a much more concise, standardised format (maximum two pages).
  • Non-categorised products (today’s Article 6 funds) would continue to make the baseline disclosure on how sustainability risks are considered, as under SFDR 1.0.
  • Voluntary disclosures will be possible under a new Article 6a, but only if they are not presented as central to the product and do not appear in the KID.

This represents a significant simplification while maintaining the core principle that all products must disclose their approach to sustainability risks.

Naming and marketing restrictions

Further, the proposal introduces strict rules on sustainability-related claims:

  • Only products qualifying under the new Articles 7, 8 or 9 may use sustainability-related terms in their names or marketing communications.
  • Non-categorised products may not make sustainability-related claims at all, even if they provide voluntary disclosures.
  • “Impact” terminology may be used only by Article 7 or 9 products that meet an additional “impact” test.

This is intended to address greenwashing and ensure clearer comparability for retail investors.

Removal of entity-level PAI reporting

A major simplification is the removal of entity-level principal adverse impact (PAI) reporting and of the requirement to disclose how remuneration policies integrate sustainability risks. 

Under the proposal:

  • Asset managers would no longer publish entity-level PAI statements.
  • Product-level PAI disclosures remain for Sustainable and Transition products.

This change reflects the alignment between SFDR and the revised CSRD reporting framework.

Scope and transition

The proposal removes portfolio management services and investment advice from the scope of SFDR. Importantly, there is no grandfathering for most financial products: once SFDR 2.0 applies, UCITS and AIFs currently operating under SFDR 1.0 must comply with the new regime. Only certain closed-ended AIFs created and distributed before SFDR 2.0 enters into force are exempt.

Negotiations with Parliament and Council will continue into 2026, with the proposal envisaging an application date around late 2028, preceded by 18-month implementation period and a 2027–2028 “start-up phase”.

How Squire Patton Boggs Can Assist

The proposed reforms would materially reshape how financial products can be marketed as sustainable, how firms substantiate ESG-related claims, and how disclosures must be designed. These changes will require firms to reassess product positioning, update internal governance, and prepare for a more prescriptive ESG framework.

Our team can support by:

  • Assessing impacts on existing product ranges, including mapping current Article 8/9 products to the new Sustainable, Transition or ESG Basics categories.
  • Preparing new documentation, including the revised pre-contractual, website and periodic disclosures, and assessing compliance with the 70% investment threshold and exclusion criteria.
  • Advising on naming conventions, marketing rules and greenwashing risk, particularly for firms active across multiple EU jurisdictions.
  • Supporting engagement with EU institutions during the legislative process as the proposal evolves.

Our team of lawyers and advisors is ready to assist with any questions and to support firms as they prepare for the future regime. Please do not hesitate to get in touch.