Under the proposals, new sustainability-related product categories would replace the existing Article 6, 8, and 9 classifications.
On 20 November 2025, the European Commission (Commission) published its proposals for amendments to the Sustainable Finance Disclosure Regulation (SFDR). Key proposals include:
- Introducing a new product categorisation system with three labels, all with a 70% threshold for assets invested in accordance with the relevant ESG strategy
- Removing entity-level disclosures on principal adverse impacts
- Significantly reducing product-level disclosures, to shorten and simplify the information provided
Background
The SFDR was conceived as a disclosure regime, designed to promote transparency and comparability amongst financial products in the EU with a sustainabilit`1y-related focus. However, the Commission has acknowledged that it is being used by some as a labelling regime in practice, which can contribute to greenwashing and mis-selling risks.
The framework has been characterised by various complexities, legal uncertainties, and interpretation issues, with core concepts such as the definition of “sustainable investment” requiring clarification through regulatory guidance. There are also notable areas of misalignment between the SFDR and other key pieces of sustainable finance regulation, such as the EU Taxonomy. These factors have contributed to compliance costs for financial market participants and challenges in providing sufficiently clear and comparable disclosures to investors.
The Commission therefore launched a review of the SFDR in September 2023, indicating that it was considering pivoting towards a labelling regime (see this Latham blog post). By way of follow-up, the European Supervisory Authorities (ESAs) published a joint opinion in June 2024, suggesting that the Commission replace the current SFDR disclosure framework with voluntary product categories, sustainability indicators, or a combination of both (for more details, see this Latham blog post), after which the EU Platform on Sustainable Finance set out its recommendations for new product categories in December 2024. This review coincides with the Commission’s broader drive for simplification of reporting frameworks. In early 2025, the Commission unveiled the Omnibus package of proposals which introduces substantive revisions across related core EU ESG frameworks. See this Latham article for more information on the Omnibus package.
A move towards a labelling regime would align the SFDR more closely with the UK Sustainability Disclosure Requirements regime. The FCA purposefully chose to create a labelling regime in the UK, having witnessed the difficulties experienced with the EU approach (see this Latham Client Alert).
The Proposals
Although the headline changes relate to the introduction of new product categories to replace the existing Article 6, 8, and 9 classifications, the Commission is also proposing a number of other notable changes to the framework that stakeholders should be aware of, as set out below.
Scope
The Commission is proposing to remove financial advisers from the scope of the SFDR so that the framework focuses on financial market participants that manufacture, manage, or make available sustainability-related financial products. This means that investment advice and portfolio management services would be out of scope.
Importantly, the Commission is proposing an exemption from the new product categorisation regime relating to closed-ended legacy products (created and distributed before the date of application of the changes). However, the Commission has removed the proposed exemption for Alternative Investment Funds made available exclusively to professional investors, which was contained in the leaked draft of the proposal published in early November. Industry responses suggest this will likely come as a disappointment to many stakeholders, as the exemption was regarded as offering a helpful reprieve. Nonetheless, it is possible that this could be added back in during inter-institutional negotiations based on feedback from industry participants.
Timing and Transition
The Commission also proposes that financial market participants would not need to apply the new product categories to certain financial products (insurance-based investment products, pension products, and pension schemes) until 12 months after the amendments apply. This is because such products are not currently subject to the ESMA guidelines on funds’ names and therefore would require more time to implement the new underlying criteria.
The proposals do not mention any other transitional provisions relating to the introduction of the new product categorisation regime, which could lead to challenges for existing Article 8 and 9 funds. Although the legislation incorporates an 18-month implementation period, some of the detail will be in Level 2 measures, and these may not be finalised promptly enough to give existing funds time to assess whether they qualify for the new categories and update their fund documentation accordingly.
Product Categorisation
The Commission is proposing to introduce a set of three product categories with harmonised qualifying criteria: “transition” (new Article 7), “ESG basics” (new Article 8), and “sustainable” (new Article 9).
Broadly, each of these would require the following:
The Commission is suggesting removing the controversial definition of “sustainable investment”, instead choosing to integrate the underlying concepts of this term within the requirements for Article 7, 8, and 9 products. However, financial market participants with Article 7 or 9 products would still need to consider the principal adverse impact indicators on sustainability factors — a change from the leaked draft position, which industry feedback suggests was the preferred approach for many stakeholders.
Nevertheless, the new approach would promote alignment with requirements for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, and with the ESMA guidelines on funds’ names using ESG or sustainability-related terms (for more details, see this Latham blog post). However, the use of hard exclusions could prove challenging in practice when it is necessary to factor in US considerations, as such exclusions may not be compatible with the approach in certain US states.
Certain details of the conditions for investments to qualify for each category would be set out in Level 2 measures, including indicators, permitted deviations, methodologies for calculating when the 70% threshold is met, and the conditions for investments to qualify as contributing towards the relevant objective. Therefore, we will need to wait for these measures to be developed to fully understand the requirements for each category. However, the Commission indicates that it envisages such measures will be limited.
Article 7 or 9 funds that use impact investing would be required to provide additional disclosures on impact, but would then be permitted to include the term “impact” in their names. Unlike the UK regime, there is no separate impact category. The proposed definition of an impact product includes a product that has as its objective the generation of a pre-defined, positive, and measurable social or environmental impact. Financial products may also consist of a combination of products falling within one or more of the Article 7, 8, and 9 categories. Such products would be subject to additional disclosures to explain their composition, although again, unlike the UK regime, there is no separate combination category.
Overall, the proposed EU structure remains hierarchical in comparison to that of the UK regime, which focuses on different goals rather than implying that one label is better than another. This may make it difficult for asset managers to directly map the different categories between the two regimes. However, it is helpful that the Commission is proposing consistent 70% thresholds for the revised EU regime, which do align with the UK approach.
Naming and Marketing
Under the proposals, financial market participants would need to ensure that any claims they make in the regulatory and marketing documentation and names of their financial products falling into one of the product categories are clear, fair, and not misleading, and are consistent with the category under which they fall.
Financial products that do not meet the criteria to fall within one of the categories would be able to include information on whether and how those products consider sustainability factors or sustainability risks in their pre-contractual disclosures, provided that this information (i) is not used in the product name or marketing communications, (ii) is not a central element of the pre-contractual disclosures, (iii) is not included in any KID (Key Information Document) prepared for the product, and (iv) does not constitute a claim about the product within Article 7, 8, or 9.
Information on the consideration of sustainability factors would also need to be included in the periodic report. This is different to the current position for Article 6 funds, which do not have an explicit periodic reporting obligation. More broadly, it is expected that Article 6 funds would likely need to review their approach under the new framework (meaning the impact would not be limited to Article 8 and 9 funds).
Disclosure Requirements
The Commission is proposing to remove entity-level principal adverse impact disclosures, which should seek to remove duplication between the SFDR and the EU’s Corporate Sustainability Reporting Directive (CSRD). Many financial market participants will likely view this as a welcome simplification, as feedback indicates that these disclosures have been challenging and costly to produce. Coupled with the planned changes to the CSRD thresholds under the Omnibus package, this proposal likely means that only the largest financial market participants would need to make such entity-level disclosures going forward.
Financial market participants would no longer need to report Taxonomy eligibility or alignment, except if relying on the Taxonomy-linked criteria under Article 7 or 9. Further, the Commission is proposing to reduce the amount of information that must be disclosed in relation to financial products, cutting down the number of sustainability indicators and hence seeking to focus on information found to be most relevant for investor decision-making. The new templates would limit product-level disclosures to two pages, with the aim to make them shorter and simpler for retail investors to understand.
Additionally, the Commission is proposing a provision to address the use of data and estimates, to try to ensure that the use of such information from external data providers is based on formalised and documented arrangements. This provision aims to enhance the credibility and transparency of data used by financial market participants.
Next Steps
The proposals must now make their way through the EU legislative process, with the Commission proposal being submitted to the European Parliament and Council for deliberation. Since the legislation envisages an 18-month implementation period, the new regime is not likely to apply until the start of 2028 at the earliest. However, given the lack of transitional measures, existing Article 8 or 9 funds and their managers should begin to consider how they might manage the transition to the new product categorisation framework.
