EU Sustainable Finance: Commission Proposes Simplification of ESG Transparency Rules for Financial Products

On November 20, 2025, the EU Commission proposed a comprehensive amendment to the Sustainable Finance Disclosure Regulation (SFDR),[1] which has been in force since 2021. The proposal (referred to here as SFDR 2.0) addresses market feedback that the SFDR has become overly complex and has been misused by Financial Market Participants (FMPs) as a labeling regime rather than a disclosure-based framework. SFDR 2.0 promises to reduce disclosures, avoid duplications, and align existing market practices through a new categorization system. SFDR 2.0 aims not only to deliver a significant simplification of the framework but also to cut FMPs’ annual disclosure costs by 25%.[2]

In this client alert, we explain the key takeaways of the SFDR 2.0 proposal for FMPs and outline what comes next.

How does the current SFDR work?

Under the existing SFDR, FMPs must disclose how sustainability risks and factors are integrated into their investment decisions:

• PAI regime (“comply or explain”): FMPs must describe the areas where they consider principal adverse impacts (PAIs) of investment decisions on sustainability factors or—if they do not consider PAIs at all—give clear reasons for not doing so (current Articles 4 and 7).
• Mandatory product-related disclosures: Where financial products make specific claims about sustainability characteristics and objectives, disclosures become mandatory; the scope of disclosures depends on the level of the individual sustainability claim:
• Article 8: For products that promote environmental or social characteristics but do not have sustainable investment as their core objective (“light green products,” e.g., ESG integration or thematic strategies), FMPs must show how they promote such environmental and social characteristics.
• Article 9: Where a product has a sustainable investment as its core objective (“dark green products,” e.g., impact or climate funds), FMPs must explain the sustainable objective and show how the objective is attained.
• Sustainability risks disclosures: All FMPs and their products are subject to the disclosures under current Articles 3 and 6. This means they must disclose how sustainability risks are integrated in the investment decision process and the results of the assessment of the likely impacts of sustainability risks on the returns of the products.

What are the key changes under SFDR 2.0?

The key changes under SFDR 2.0 are as follows:

• New categorization with three product categories (replacing current Articles 8/9): The EU Commission proposes three new, objective categories for sustainability-related products:
• Transition Category (new Article 7): Products that claim to have “a transition-related objective,” i.e., to target investments that aim to support the transition of companies, economic activities, and other assets towards more sustainable business practices in, e.g., climate, environmental, or social areas.
• ESG Basics Category (new Article 8): Products that claim to “integrate sustainability factors,” i.e., target investments that do not specifically pursue a sustainability- or transition-related objective, but apply an environmental, social, or governance-related approach (e.g., by focusing on best-in-class performers on a given ESG metric, pursuing financial returns while excluding the worst ESG performers).
• Sustainable Category (new Article 9): Products that claim to “have a sustainability-related objective,” i.e., that invest primarily in assets that positively contribute to environmental or social objectives (e.g., climate change mitigation).
• No more discretion: Under SFDR 2.0, FMPs would no longer have “discretion” over how they promote their products (provided they comply with the relevant disclosure obligations and subject to greenwashing prohibitions). Rather, FMPs would only be allowed to promote a financial product with sustainability-related claims if:
• the product meets certain conditions relevant to that claim, and
• the financial market participants fulfill certain transparency requirements.
• Reduction of product-level disclosures: Product-level disclosures would only be required where products fall in one of the three product categories. Where disclosures are required, SFDR 2.0 would maintain the pre-contractual, website, and periodic disclosures. But disclosures would be shortened and simplified (e.g., by reducing the number of topics covered in disclosure templates). The EU Commission would be empowered to limit pre-contractual and periodic disclosures to new product-level templates capped at two pages, focused on the most relevant sustainability indicators. Website disclosures would remain mandatory but would only need to host the standardized pre-contractual and periodic templates, removing the need for additional website-specific content.
• Removal of entity-level PAI disclosures: SFDR 2.0 would abolish the current PAI disclosure regime at the entity level (current Article 4) and move product-level PAI disclosures (current Article 7) to the individual product categories. As part of the conditions to be fulfilled by FMPs if they want to market their products in one of the three product categories, FMPs are now required to identify and disclose PAIs and explain the actions taken to address those impacts. For their PAI disclosures, they may use appropriate sustainability-related indicators. The previously leaked Commission draft had provided for a complete removal of PAI disclosures.
• Deletion of “sustainable investment” definition: The existing definition of a “sustainable investment” (current Article 2 point 17) would be deleted along with the “do no significant harm” (DNSH) principle and “good governance” requirements. These concepts would be replaced by mandatory exclusions of investments and a mandatory list of permitted investment types as part of the conditions of the three product categories.
• Narrower scope: An exemption from the mandatory product categorization regime would apply to closed-ended funds that are no longer open to new investment at the time SFDR 2.0 enters into force. Unlike in the previously leaked Commission draft, this exemption would not apply to alternative investment funds. Financial advisers and portfolio managers would be removed entirely from the SFDR scope, as they do not manufacture financial products.
• New naming and marketing rules: SFDR 2.0 would build on the ESMA Guidelines in funds’ names. ESG or sustainability terms could only be used by one of the three categorized products. The term “Impact” would be restricted to products with measurable impact objectives. Non-categorized products (new Article 6a) would be allowed to include voluntary ESG information subject to strict limitations. Such funds would not be allowed to use ESG information in fund names or marketing communications, to make it a central element of precontractual disclosures (it must be less than 10% of the investment strategy description), or to include it in the Key Investor Information Document.

How will the new product categories work?

The new product categories would function based on three main criteria:

• Exclusions, meaning that FMPs cannot invest in certain industries or activities that are considered incompatible with the category (e.g., for products from the Sustainable Category, no investment in companies that “develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels”).
• Positive contribution thresholds, meaning that a minimum 70% of the portfolio must follow an ESG strategy that aligns with the relevant sustainability claim (i.e., products from the Sustainable Category must have “a 70% threshold linked to the proportion of investments to meet a clear and measurable objective related to sustainability factors, including environmental and social objectives, in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicators”). The requirement of positive contribution would be considered met for environmental-focused portfolios with a proportion of investments of at least 15% in economic activities that are aligned with the EU Taxonomy.[3]
• Investment from a mandatory list of permitted investment types, meaning that investments underlying the 70% investment threshold must include any investments or combination of investments explicitly referenced in SFDR 2.0 (e.g., for products from the Sustainable Category, this would include investments in “portfolios replicating or managed in reference to an EU Paris-aligned benchmark”).

In case of categorization, FMPs would additionally have to comply with certain transparency requirements (statement of compliance with product-related conditions, description of objectives, factors, compliance strategy, and choice of investments related to the relevant sustainability claim, and description of data sources used to inform these disclosures).

What stays the same?

In-scope companies under SFDR 2.0 would remain under an obligation to disclose sustainability risks similar to current disclosure obligations (current Articles 3 and 6).

Will SFDR 2.0 simplify accessing ESG data?

Under SFDR 2.0, less information would have to be obtained and disclosed; the information that must be disclosed would relate to data that the EU Commission considers to be more broadly available.[4] FMPs would be allowed to rely on estimates where granular data is missing, obtained either from external data providers or generated in-house (new Article 12a). FMPs would then have to be transparent toward investors on the methodology used.

Will SFDR 2.0 interact with Omnibus I and keep relying on the EU Taxonomy?

SFDR 2.0 reflects Omnibus I and seeks to eliminate duplication with the Corporate Sustainability Reporting Directive (CSRD). By abolishing entity-level disclosures, SFDR 2.0 reflects the changes introduced through Omnibus I, in particular the CSRD’s new scope. Only the largest FMPs, subject to the updated CSRD thresholds, would need to disclose their company-level impacts on the environment and society as part of their CSRD disclosures. The new categorization system would also rely on fewer datapoints and thus help overcome data gaps, as SFDR disclosures would be more adapted to data that is available under the revised CSRD and from other sources or which can otherwise be reliably estimated.

Mandatory disclosures on EU Taxonomy alignment are limited to the Transition and Sustainable Category (new Articles 7 and 9) where FMPs may have to identify their EU Taxonomy-aligned investments to demonstrate compliance with the thresholds.

What should FMPs do now and what is coming next?

Currently, the EU Commission has only proposed the abovementioned amendments to the SFDR. The Commission proposal will be now negotiated by the co-legislators, the EU Council and the EU Parliament. Meanwhile, the current SFDR regime remains in force. FMPs should therefore ensure compliance with the current regulation while monitoring the legislative process regarding SFDR 2.0. Once endorsed by the co-legislators, SFDR 2.0 will apply 18 months after its entry into force, which the EU Commission considers possible by mid-2027. Therefore, application of SFDR 2.0 might not start before end of 2028. Subsequent implementing measures to determine details of the framework would be developed in a second step.

[1] Regulation (EU) 2019/2088.

[2] EU Commission, Q&A on the Sustainable Finance Disclosure Regulation, November 20, 2025.

[3] Regulation (EU) 2020/852.

[4] EU Commission, Q&A on the Sustainable Finance Disclosure Regulation, 20 November 2025.