EU policy and regulation update: SFDR draft, TNFD guidance and ESRS postponement

The European Union is accelerating its regulatory agenda for sustainability, with a coordinated set of measures designed to strengthen transparency, improve the credibility of green finance and expand the scope of climate and nature disclosure. The latest updates include a proposed overhaul of the Sustainable Finance Disclosure Regulation (SFDR), refined guidance from supervisory authorities, new nature-data recommendations and insights from national regulators on climate-risk governance.

At the core of the developments is the publication of a legislative proposal to reform the SFDR framework. The current Article 8 and Article 9 product categories would be replaced with three clearer classifications: products with a transition-related objective, products that integrate sustainability factors and products with a sustainability-related objective. Each category would carry mandatory criteria, including minimum sustainability thresholds and exclusion rules such as restrictions on companies deriving more than one per cent of revenues from hard coal or lignite. The proposal also removes the previous exemption that allowed certain professional-only funds to opt out, meaning the revised rules will apply broadly across the investment market. Implementation is expected to take effect roughly 18 months after the final rules enter into force, pointing to a likely operational deadline in 2028.

The reform marks a shift toward a more label-driven sustainable finance regime. By introducing clearer categories and minimum standards, the EU aims to reduce market confusion and minimise greenwashing, while providing investors with more consistent and comparable information. For financial institutions, this will require reassessing product classifications, reworking disclosures and preparing for shorter, standardised templates that emphasise clarity and evidence.

In parallel, the EU’s nature-related agenda is expanding. New recommendations have been issued to improve the quality and accessibility of data on ecosystems and biodiversity. These proposals highlight the need for harmonised metadata, shared licensing frameworks and a digital protocol to facilitate nature-data exchange. The emphasis signals a broader evolution in EU sustainability policy, where the impact of economic activity on natural systems is treated with the same materiality as climate emissions and energy use.

Supervisory authorities have also published updated guidance clarifying how financial institutions should disclose principal adverse impacts. Institutions are expected to explain how they determine whether an adverse impact requires intervention, outline the actions taken during the previous reporting year and set out their planned actions or targets for the next period. The direction of travel indicates that sustainability information must not only be reported but also supported by evidence-based decision-making.

Beyond finance, new research from the Bank of Italy shows that many non-financial firms remain behind on climate-risk governance. In a survey of several hundred companies, fewer than half reported measuring their greenhouse-gas emissions, and a similar proportion lacked a dedicated governance structure for climate-risk oversight. Many firms classified their exposure to physical climate risks as low, even when operating in regions vulnerable to extreme weather. These findings suggest continuing gaps in corporate readiness, with potential implications for access to financing and supervisory expectations.

Academic work from France and Spain further highlights how regulatory design influences innovation. National-level green regulations were found to support firm-level innovation, while fragmented regional requirements showed mixed or weaker effects. The findings point to the importance of coherent policy architecture in accelerating sustainable technology development.

Consumer protection is also tightening. Italy has approved legislation transposing EU rules aimed at combating misleading environmental claims. Vague or unverified terms such as “carbon-neutral” or “zero-impact” are now explicitly restricted unless supported by rigorous evidence. Enforcement measures place greater responsibility on companies to substantiate claims and enable regulators to intervene when sustainability marketing lacks credibility.

Practical Implications for Stakeholders

Financial institutions face the most immediate operational impact. Asset managers will need to reassess their portfolios, verify alignment with the new SFDR categories and strengthen data collection processes. Products marketed with sustainability characteristics will need to demonstrate compliance with thresholds and exclusions.

Corporations across sectors should prepare for heightened scrutiny of emissions measurement, climate-risk management and nature-related dependencies. As supervisory bodies integrate climate and nature risks into credit assessments, firms lacking robust governance frameworks may face financial or regulatory pressure.

Consumers stand to benefit from enhanced protections against misleading environmental claims. The shift toward strict evidence requirements increases transparency and supports more informed decision-making.

Policymakers and regulators must balance innovation and oversight. Research suggests that harmonised national frameworks drive stronger outcomes, while fragmented requirements can undermine regulatory effectiveness.

Outlook

Taken together, the reforms illustrate a continued tightening of the EU’s sustainability landscape. The movement from broad disclosure rules to structured product categories, combined with expanded nature-data expectations and stronger consumer protections, creates a more mature and disciplined regulatory environment. Organisations that invest early in high-quality data, governance structures and credible transition plans will be better positioned as regulatory expectations continue to rise. Those that delay may face growing compliance burdens, reputational risks and market disadvantages.

Source: www.clearygottlieb.com