Applying since 2021, the Sustainable Finance Disclosure Regulation (SFDR) was proposed in 2019 as a response to goals set in the Action Plan: Financing Sustainable Growth around reducing greenwashing, redirecting capital flows to sustainable activities, and improving transparency on how sustainability risks and factors were considered in the financial products offered to investors.
With annual investment needs for EU’s climate goals exceeding €477 billion ($551.5 billion) during 2020 and 2021, the European Green Deal and the latest sustainable finance strategy strengthened the SFDR’s role as a framework central to the regional transition efforts.
In November 2025, the European Commission proposed an SFDR review, aiming to amplify good practices and address implementation challenges.
SFDR 1.0 in a nutshell
The SFDR introduces extensive product and entity-level disclosures for financial market participants and financial advisers.
At entity level, firms must explain how they integrate ESG considerations into their internal and due diligence processes, including annual reporting on selected principle adverse impact indicators (PAIs) consisting of selected environmental, social, and governance indicators.
Product-level disclosures include reporting on the integration of sustainability risks in the investment decision process. In addition, depending on whether the financial product falls into the Article 6 (no sustainability integration), Article 8 (environmental/social characteristics) or Article 9 (environmental/social objectives) classification, firms need to prepare pre-contractual, website, and periodic disclosures using detailed templates.
Benefits, frictions, and synergies
The SFDR has improved transparency and brought increased awareness of ESG governance in financial firms. At the same time, the use of templates allowed for more structured disclosure and more efficient supervision.
On the flip side, the most obvious challenge has been the misuse of Articles 6, 8, and 9 as a form of labeling instead of disclosure. Additionally, complex and prescriptive templates, low data quality, and varying interpretations of definitions in the SFDR and other EU sustainable finance legislation had proven to be particularly challenging.
These challenges could potentially be resolved not only with the SFDR review, but also through the simplification of the corporate reporting framework, which has just been completed under the Omnibus I package.
Responding to our request for comment, a spokesperson for the European Banking Authority (EBA) recognized the existence of overlaps between SFDR and CSRD/ESRS disclosures, whose parallel reviews may bring certain alignment-related challenges.
In its opinion, the EBA has noted that the amended ESRS should allow for the institution’s data needs for risk management purposes to be met, and also facilitate interoperability with international standards and complementarity with disclosures under Article 449a of the Capital Requirement Regulation (CRR) related to ESG risks. Acknowledging the importance of granular data, the EBA has emphasized that simplification is about better regulation, not deregulation.
Proposed SFDR review
The Commission’s review proposal addresses both the wide support for the SFDR policy goals and the implementation challenges. Key elements include:
- Scope: The focus is on financial market participants who manufacture, manage, or distribute financial products to investors, with financial advisers and portfolio services out of scope.
- Product categories: The proposal introduces three product categories, based on their sustainability agenda: “Transition,” “ESG basics,” and “Sustainable objective.” Among other requirements, each category commits to a mandatory set of exclusions along with a minimum of 70% of sustainable investment threshold.
- Impact investing: For the first time, a nod is made to impact investing by introducing “sustainability-related financial product with impact,” allowing for positive social or environmental impact to be recorded.
- Removal of sustainable investments definition: Funds pursuing environmental and social objectives will be aligned with the environmental objectives in the Taxonomy Regulation and the principles of the European Pillar of Social Rights and Sustainable Development Goals, respectively.
- Removal of entity-level disclosures to ensure no duplication, given that horizontal entity-level disclosures will be provided through the CSRD/ESRS.
- Marketing: Better alignment with ESMA’s Guidelines on fund names clarifying that only products belonging to the three categories may use sustainability-related terms in their name and present ESG metrics in their marketing materials, with exceptions for some non-categorized products only.
The leading themes behind the review seem to be simplification, legal certainty, and improved alignment with other files in the sustainable finance framework, particularly in relation to Omnibus I, which amends the Taxonomy Regulation and the CSRD.
Responding to us through a spokesperson, the European Commission explained that the SFDR revision aims to align with the Omnibus, as the new categorization system relies on fewer data points that have been adapted to the revised CSRD. Additionally, to stimulate the now voluntary use of the Taxonomy, certain products with 15% or more invested in taxonomy-aligned assets are viewed as having met the 70% contribution criterion under SFDR.
When asked whether the SFDR revisions are intended to support data consistency and comparability, the Commission clarified that the new system would streamline the investment journey, allow better comparability, and a higher level of investor protection. Fewer data points will allow for more meaningful information to be obtained “helping to prevent both greenwashing and green hushing (a practice in which market operators under-report sustainability efforts due to a fear of being accused of greenwashing).”
Legislative outlook and practical considerations
The proposal for revised SFDR will soon enter negotiations between the European Parliament and Council of the European Union.
For Nordic and Baltic firms who often operate across borders and in a relatively integrated market, close monitoring of the political outcomes and early preparation will be essential. In the future, practitioners can focus on the following actions:
Short term: Conduct an analysis mapping current Article 8 and 9 products against the newly proposed SFDR categories.
Medium term: Monitor legislative procedure and potential Level 2 amendments (regulatory technical standards defining templates used in disclosures).
Long term: Anticipate possible adjustments to MiFID II and IDD and ESMA’s Guidelines on fund names using ESG and sustainability-related terms to capture changes in scope and product categories.