EU to Revise Sustainable Finance Disclosure Regulation to Strengthen Clarity and Combat Greenwashing

The European Commission is preparing a significant revision of the Sustainable Finance Disclosure Regulation (SFDR) - Regulation (EU) 2019/2088, with a legislative proposal scheduled for publication in November 2025. The reform, announced in the Commission’s 2025 Work Programme, seeks to improve transparency in the financial sector, close data gaps, and address inconsistencies with related legislation, including the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation.

Background: A Cornerstone of the EU’s Green Finance Framework

Adopted in 2019, the SFDR requires financial market participants and advisors to disclose how they integrate sustainability risks into investment decisions. It was a key step in the EU’s effort to align private capital with the European Green Deal, the Paris Agreement, and the UN 2030 Agenda for Sustainable Development. The regulation became applicable in March 2021 and was intended to curb greenwashing by providing investors with reliable, comparable sustainability data.

However, since its implementation, the SFDR has faced persistent challenges. A European Commission assessment conducted in 2023 and consultations held in 2024 revealed widespread support for the regulation’s objectives but strong criticism of its complexity and inconsistent application. Stakeholders cited ambiguous definitions, overlapping requirements with other EU laws, and high compliance costs that often outweighed the benefits.

Key Challenges Identified

Nearly all respondents to the Commission’s 2023 consultations, 98 percent of financial market participants, reported difficulties obtaining reliable sustainability data. Many also described the SFDR as being used more as a “labelling and marketing” tool than a disclosure framework. The lack of clarity around key concepts such as “sustainable investment” and the inconsistent interpretation of Articles 8 and 9 have led to uneven reporting practices and investor confusion.

These problems have also affected trust in green financial products. Research cited by the European Parliament found that many Article 9 funds, those claiming a sustainable investment objective, continue to invest in polluting sectors or assets linked to human rights concerns. Such findings have prompted accusations of “greenwashing” and calls for stronger regulatory oversight.

What the Revision Aims to Address

The 2025 review intends to simplify and standardize disclosure requirements. Among the reforms under consideration are:

• Clarification of core concepts such as “sustainable investment” and “principal adverse impacts” (PAIs);

• Introduction of a new categorisation system for financial products, potentially creating three distinct labels: “sustainable”, “transition”, and “ESG features”;

• Improved regulatory coherence across the SFDR, CSRD, Taxonomy Regulation, and Markets in Financial Instruments Directive (MiFID II);

• Uniform disclosure requirements for all financial products, with additional indicators for those claiming sustainability objectives.

The Commission has emphasized that these changes are intended to make sustainability data more useful for investors while avoiding duplication with corporate reporting obligations. This is particularly relevant given the Commission’s ongoing “Omnibus I Simplification Package”, which seeks to reduce reporting burdens for companies without weakening climate ambition.

European Parliament and Institutional Input

The European Parliament has been actively monitoring SFDR implementation through studies and resolutions. A 2024 Parliament study concluded that while the SFDR helped raise awareness of sustainability risks, it remained too complex for retail investors and too fragmented for effective supervision. It recommended a simpler, consumer-tested product labelling system, better alignment with corporate sustainability reporting, and mandatory disclosure of adverse impacts for all financial products.

Advisory bodies have echoed these concerns. The European Economic and Social Committee (EESC) warned that excessive simplification of reporting rules could undermine ambition and transparency. The European Central Bank highlighted that while the SFDR influences banks’ investment behaviour, the framework’s complexity risks discouraging green finance. Similarly, the European Supervisory Authorities (ESAs) reported uneven disclosure quality among financial market participants, especially smaller institutions.

Stakeholder and Industry Positions

Industry groups such as the European Fund and Asset Management Association (EFAMA) and the European Sustainable Investment Forum (Eurosif) have jointly called for a standardised, investor-centric classification system with clear minimum criteria. Their proposals align with recommendations from the Commission’s Platform on Sustainable Finance, which suggests three main product categories: sustainable, transition, and ESG collection, to align investment labels with measurable outcomes.

Both EFAMA and Eurosif also stress that the SFDR revision must remain coherent with the CSRD and the EU Taxonomy to avoid contradictory requirements. Similarly, the Association for Financial Markets in Europe (AFME) and the International Swaps and Derivatives Association (ISDA) advocate for digital disclosure systems, clearer thresholds, and inclusion of derivatives and structured products in the sustainability framework.

Implications for Sustainable Finance

If implemented effectively, the upcoming revision could mark a turning point for EU sustainable finance policy. A clearer and more harmonised SFDR would help reduce compliance costs, increase investor confidence, and channel private capital more efficiently toward green and transition projects. However, balancing simplification with robust oversight remains a challenge. Regulators must ensure that easing reporting burdens does not weaken accountability or open the door to new forms of greenwashing.

The revised regulation is expected to be adopted during the next legislative cycle, potentially entering into force in 2026. Its success will largely depend on coordination across EU institutions, effective supervision, and the availability of reliable sustainability data.

Source: europarl.europa.eu/