The Sustainable Finance Disclosure Regulation (SFDR), the regulatory pillar of the European Commission's Action Plan on Sustainable Finance, has introduced a fundamental paradigm shift starting in 2021 for financial market. Based on Regulation (EU) 2019/2088, this tool was created with the dual objective of strengthening transparency on ways of integrating factors ESG in investment decisions and improve comparability between financial products.
The introduction of the legislation has fostered an unprecedented growth in investments defined as “SRI” (Social and Responsible Investments) in Europe.
However, the first years of application have highlighted operational complexities and structural critical issues that made corrective action necessary at the end of 2025. Despite the contribution in counteracting the Greenwashing, the effectiveness of SFDR has been limited by interpretive difficulties which in some cases have led to a misuse of categories, as well as from Bureaucratic burdens which have sometimes hindered the real ability to analyze the environmental and social characteristics of the products.
The planned update to the Regulation therefore aims to overcome these limitations, evolving towards a more fluid system that is less subject to arbitrary interpretations.
What does the proposal to update the SFDR Regulation provide
The reform proposal presented by the European Commission on 20 November 2025 marks the beginning of a profound review, necessary for correct distortions emerged in the first years of application of the regulation. The central objective is the transition from a system based on complex reporting obligations to a model more operational and close to market dynamics, thus reducing the bureaucratic burden and the risk of greenwashing.
The most radical change concerns the exceeding the current articles 7, 8 and 9, which will be replaced by a new categorization system based on three product classes clearly defined, all united by a minimum threshold for aligned investments equal to at least 70%:
- Transition, dedicated to products that finance the transition to more sustainable economic models, with improvement objectives that can be measured over time;
- ESG basics, for products that integrate fundamental environmental, social and governance criteria into their investment strategy;
- Sustainable, reserved for products with the most rigorous and ambitious sustainability objectives, aimed at generating a direct positive impact.
This new structure imposes specific requirements in terms of investment strategies, exclusion criteria and sustainability measurement, requiring managers to important work of realigning portfolios.
In parallel with the recategorization, the reform introduces substantial simplifications to make the rules more proportionate. Among the main changes stand out the review of the scope of application, which will focus exclusively on financial market participants, excluding advisors and portfolio managers, and the elimination of complex obligations related to Principal Adverse Impacts (PAI) at the entity level.
It is also proposed to remove the formal definition of “sustainable investment” And from the beginning DNSH (Do No Significant Harm) as concepts in their own right, replaced by the larger picture of “sustainability-related financial product”. In this new approach, the principle of 'do not cause significant harm' is not eliminated, but incorporated directly into the mandatory exclusion criteria planned for all three new categories. This integration makes it possible to simplify information on issues such as management remuneration and the integration of sustainability risks, with the intention of returning to the market a clearer, more coherent and long-term oriented tool.
What do the new articles 7, 8 and 9 of the SFDR Regulation provide
As mentioned above, the heart of the reform lies in the transition from a simple information regime to a stricter and more functional categorization. The new articles 7, 8 and 9 define precise technical requirements that products must meet in order to be able to use certain designations.
Article 7: Transition
This category is designed for those assets that accompany companies and economic activities on the path to sustainability, with improvement objectives that can be measured over time.
- Objective: at least 70% of investments must be allocated to a clear and measurable transition objective, be it environmental or social.
- Exclusions: the restrictions of the Climate Transition Benchmark (CTB) apply, including the limits on new projects related to fossil fuels without a plan of Phase-out.
- Safe Harbor: The product complies if it replicates a CTB or PAB benchmark, or if it demonstrates an alignment with the EU Taxonomy of at least 15%.
- Impact: if the objective is to generate a positive and predefined benefit, these products can also qualify as “impactful”.
Article 8: ESG Basics
The renewed Article 8 governs products that integrate fundamental environmental, social and governance criteria into their investment strategy.
- Objective: involves the investment of a minimum threshold of 70% in assets that actively integrate sustainability factors and risks.
- Exclusions: similar to the previous category, but with greater flexibility for projects related to fossil fuels without decommissioning plans.
- Safe Harbor: No automatism. There are no automatic compliance clauses for this category; consistency must be actively demonstrated by the manager.
- Impact: being focused on the integration of basic criteria, this category does not usually provide for the specific “impact” qualification.
Article 9: Sustainable
Article 9 is reserved for products with the most rigorous and ambitious sustainability objectives, aimed at generating a direct positive impact.
- Objective: at least 70% of the portfolio must be oriented towards achieving a specific sustainability objective, supported by rigorous metrics.
- Exclusions: in addition to the criteria of Article 7, the restrictions of the PAB benchmarks apply, the strictest in terms of decarbonization.
- Safe Harbor: compliance is facilitated if the product replicates a PAB benchmark or if it guarantees a minimum alignment of 15% with the EU Taxonomy.
- Impact: these products can qualify as “impactful” in the presence of measurable and predefined social or environmental objectives.
What are the main impacts for financial markets
The entry into force of the new provisions requires financial market participants to structural adjustment which goes far beyond simply reviewing documentation.
The main impact concerns the need to align operational processes and portfolio strategies with more stringent and uniform criteria.
In particular, operators will be called upon to intervene on different fronts.
- Review of asset allocations and investment strategies: the introduction of minimum alignment thresholds of 70% for all categories requires constant monitoring and stricter internal governance. Managers must ensure that the composition of portfolios consistently complies with these limits to avoid downgrades of products.
- Management of ramp-up periods: for new products or those in transition, the adjustment periods stated in the pre-contractual documents must be consistent over time and supported by timely reporting, which demonstrates the progressive achievement of the stated objectives.
- Strengthening ESG measurement and monitoring systems: the regulatory update introduces stricter technical requirements, such as the obligation to exclude investments related to controversial weapons, tobacco, coal, lignite and companies that violate OECD or UN principles. Added to this are stricter criteria for the standardization of Naming, so that the name of the product faithfully reflects the underlying strategy. An important news concerns the Disclosure of the PAI (Principal Adverse Impacts): although the publication obligations at the entity (company) level have been eliminated, these are reintroduced at the individual product level For categories Transition (ex art. 7) and Sustainable (ex art. 9), with the aim of analyzing in detail the negative effects of investments. On the other hand, this obligation is not provided for products. ESG Basics (ex art. 8).
- Distinction between generic ESG and impact investing: the clear separation between these two types of investment will require the development of much more robust measurement frameworks, capable of isolating and demonstrating the real and additional impact generated by financial choices.
What changes for disclosure with the changes to the SFDR regulation
The reform aims at a radical simplification of reporting obligations, with the aim of making the data truly comparable between different operators. The most tangible change concerns the introduction of new standardized templates for pre-contractual and periodic documentation, which will have a maximum length of two pages.
Within these models, all financial products classified as sustainable (articles 7, 8 and 9) must clearly state:
- a Declaration of Conformity specific to the category to which they belong;
- the Description of objectives of transition or ESG factors, accompanied by the planned strategy for maintaining the minimum threshold of 70%;
- the List of sustainability indicators and the exclusion criteria applied;
- the Detail of the data sources and the assumptions behind any estimates used.
This paradigm shift is supported by a strong push towards digitalization: the integration of data into the European ESAP platform (European Single Access Point) will impose important technological adjustments on asset managers and asset managers. Although this requires a significant initial commitment in terms of IT and compliance, the transition to a market based on standardized and transparent data will allow drastically reduce the risk of greenwashing, offering final investors finally homogenous valuation tools.
What are the positive and negative aspects expected with the revision of the SFDR Regulation
The reform of the SFDR aims at a balance between operation and rigor. While on the one hand it solves historical critical issues, on the other hand, it raises doubts about the resilience of the integrated approach to sustainability.
The strengths
- Clarity and comparability: the new category system (Transition, ESG Basics, Sustainable) eliminates the ambiguities of articles 8 and 9, allowing direct comparisons between products.
- Fight against greenwashing: strict rules on marketing and the naming of funds ensure that the name of a product faithfully reflects its real strategy.
- Data Management: greater flexibility in the use of estimates and standardization of sources to fill current information gaps.
The critical issues
- Less corporate responsibility: the elimination of PAIs at the entity level and of the DNSH principle risks weakening the overall vision of an organization's commitment to sustainability.
- Absent engagement: there is no requirement for active dialogue strategies with companies, not even for transition products (Article 7), losing an important lever for change.
- Risk of misalignment: the reduction of the scope of other directives (CSRD and CSDDD) could limit the availability of quality data, making the work of investors more complex.
Although the reform makes life easier for distributors and consultants, the actual utility will depend on the ability of legislators to harmonize these innovations with international standards and with ESMA guidelines, ensuring that simplification does not translate into a loss of ambition for European sustainable finance.
What are the activation times
The legislative process for the reform of the SFDR follows a defined roadmap, designed to give operators the time necessary to adapt their portfolios and internal procedures.
If the proposed changes are confirmed in their current form, the new provisions will become applicable 18 months after the date of their entry into force. A further extension is also planned for sectors that have greater managerial complexity: for insurance and pension products, in fact, a waiver has been granted of Additional 12 months.
This time window will allow asset managers and pension institutions to manage the transition to the new categories (Transition, ESG Basics and Sustainable) in an orderly manner, ensuring business continuity and correct information for final investors.
