The European Commission on Thursday unveiled sweeping changes to Europe’s Sustainable Finance Disclosure Regulation, replacing today’s Article 8 and Article 9 designations with a new set of product categories built around strict minimum investment thresholds and mandatory exclusions. The reform marks the most significant reset of European sustainable fund rules since SFDR took effect in 2021.
At the centre of the new framework are three groups: ‘Sustainable’, ‘Transition’, and ‘ESG Basics’. Each requires at least 70 percent of a fund’s assets to meet category-specific criteria, a shift that Brussels says will improve clarity, comparability and investor protection across the market.
“The categories will simplify the investment journey of retail investors and help them make informed investment decisions,” the commission said in its announcement.
“Today, managers can apply ESG criteria to only part of a portfolio. Now the expectation is that the majority of the portfolio must align with what is written in the documentation.”
Antoine Portelange, Arendt
Antoine Portelange, senior associate at Luxembourg law firm Arendt, said the shift to thresholds was designed to address the wide variation in how managers previously applied environmental and social criteria. “You need to have a threshold of at least 70 percent of your investments meeting the criteria of your category,” he said. “Today, managers can apply ESG criteria to only part of a portfolio. Now the expectation is that the majority of the portfolio must align with what is written in the documentation.”
The new structure roughly echoes the United Kingdom’s Sustainability Disclosure Requirements (SDR). Portelange said officials in Brussels and London had been studying one another’s frameworks. “For sure they took what they wanted to take out of the SDR. You can see some inspiration, and the 70 percent rule is clearly one of them,” he said.
The Commission described that 70 percent represents “a high portion of investments” that support “the chosen sustainability strategy and exclude from all their portfolio investments in harmful industries and activities”.
As few labels as possible
Brussels opted for three categories rather than four, a contrast with the UK system. Valérian de Jamblinne, manager at Arendt Regulatory & Consulting in Luxembourg, said there had been industry debate about whether impact investing deserved a dedicated standalone label. “The Commission believes it is better to have as few labels as possible, especially for retail investors,” he said. “That is why impact becomes an add-on rather than its own separate category.”
The decision to remove the definition of “sustainable investment” from EU law marks another break from the existing regime. Instead, managers must comply with a set of minimum exclusions based notably on EU benchmark rules and disclose their sustainability approach using a standardised two-page template.
Hortense Bioy, head of sustainable investing research at Morningstar, welcomed the move toward simpler disclosures. “Asset managers will just need to provide a two-page template rather than the long annexes currently in prospectuses,” she said. “PAI disclosure will be limited, and there will be minimum exclusions for all three product categories, which is what investors wanted.” She added that the streamlined format should help investors compare funds more easily. “There’s only so much you will be able to say on two pages. Under the first version of SFDR, the volume of disclosure sometimes gave the impression that some funds were doing a lot, and that is going to disappear.”
“Under the first version of SFDR, the volume of disclosure sometimes gave the impression that some funds were doing a lot, and that is going to disappear.”
Hortense Bioy, Morningstar
She added that the streamlined format should help investors compare funds more easily. “There’s only so much you will be able to say. Under the first version of SFDR, the volume of disclosure sometimes gave the impression that some funds were doing a lot, and that is going to disappear.”
Reshuffle
The reform is expected to trigger widespread reshuffling of fund classifications. Bioy said the new rules make Article 8-style ESG integration insufficient for a label. “Article 8 is going to shrink by kicking out those funds that just do ESG integration with a view of mitigating risks,” she said. “Only funds with binding environmental or social characteristics will remain.”
She also expects all transition strategies to fall under the new Article 7 category, “including those transition funds currently in Article 9,” she said. “Despite these moves, the new Article 9 category dedicated to sustainable products is likely going to grow because there is no longer a requirement to have 100 percent sustainable investments, even if you will still need to meet the new no fossil fuel requirements.”
Greenwashing remains option
Still, experts cautioned that greenwashing concerns will not disappear entirely. De Jamblinne said mandatory exclusions and clearer thresholds will improve alignment but not eliminate risks. “It will go in the right direction, but with SFDR 2.0 you still have a lot of flexibility in what you are doing,” he said. “It is not because we have SFDR 2.0 that all greenwashing risks will disappear forever.”
“If you want to hide something and oversell your ESG preferences, you would still be able to do it.”
Antoine Portelange, Arendt
Portelange shared a similar view. “Overall it is still about transparency, so you can be transparent the way you want,” he said. “If you want to hide something and oversell your ESG preferences, you would still be able to do it. The risks are not really changing. You still have reputational risk and regulatory risk.”
The Commission said the new rules would reduce administrative burden by removing unnecessary reporting obligations and narrowing the scope of SFDR. Portfolio managers and investment advisers fall out of scope entirely, while non-retail alternative funds may choose to opt out of the product-category regime. Portelange said the simplification would be welcomed by parts of the industry. “If you are a non-retail fund, you can exit the scope,” he said. “This is very much welcome.”
Implementation standards still to be agreed
The detailed technical standards, including how to calculate the 70 percent threshold and how to document category alignment, will be set during the Level 2 process later this year. Portelange sees three issues as central: “the presentation of disclosures, the calculation of the 70 percent, and guidance on the indicators that can be used, especially under the new ESG Basics category.”
De Jamblinne warned that regulators must guard against national fragmentation when interpreting the rules. “The definition of proper justification can range by country,” he said. “Fragmentation is something we all want to avoid.”
Bioy said a principles-based approach will be essential. “If they remain principles-based, it would be better than being prescriptive, otherwise the regime risks stifling innovation,” she said.
Asked whether the reform constitutes a radical break, all three experts described it the same way: an evolution rather than a revolution. “It is an evolution towards simplification. It is not a revolution where we are changing everything we know,” De Jamblinne said.
‘Step backwards’
Civil society groups criticised the proposal. Isabella Ritter, senior EU policy officer at ShareAction, called it “a dangerous step backwards for Europe’s sustainability agenda,” arguing the Commission has “stripped away key safeguards” that help investors understand the real-world impact of their portfolios. Removing disclosure requirements on how financial institutions affect people and the planet leaves investors “in the dark,” she said, while optional stewardship in only one category “slows down the transition to a more sustainable economy.”
WWF raised similar concerns. Thibault Girardot, sustainable finance policy officer at WWF Europe, said the new categories “look structured on paper but lack the safeguards needed to add real value.” Weak criteria mean that even low-ambition products may qualify, while oil and gas expansion remains permitted under ESG Basics.