The Winds of Change for Sustainable Finance in Europe

Throughout 2025, the EU Commission has focused on revising and simplifying its sustainable finance regulations. The goal is clear: to set a new standard that helps Financial Market Participants (FMPs) reduce compliance efforts and costs, while making requirements easier and disclosures more understandable for investors.

The process was started in early 2025 when the European Commission published its proposal on the so-called Omnibus package, aimed at simplifying and consolidating the reporting obligations under the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and the Sustainable Finance Disclosure Regulation (SFDR). In April 2025, the EU Parliament introduced a “Stop-the-Clock” mechanism to give companies more time to prepare for new reporting and due diligence obligations, delaying the start dates for the CSRD and CSDDD.

In May 2025, the EU Commission officially launched the SFDR revision process by opening a Call for Evidence to collect the feedback from FMPs across the EU. The goal was to assess how the Regulation has performed since its implementation in March 2021. The feedback highlighted a key point: the current framework results in disclosures that are too long and complex, making it difficult for investors to understand and compare the sustainability characteristics of financial products. These insights led to a new legislative package of changes, announced on 20 November, which envision the resolution of weaknesses in the Regulation, identified during the past 4 years since its inception, by streamlining the rules to be simpler, more effective, and all of this in respect of prevailing market dynamics.

The proposed amendments aim to offer improvement for all pain points identified so far, and shift from a disclosure-only system to a true product categorization regime. This includes three new voluntary fund categories, mandatory exclusions, and significantly simplified reporting requirements.

The New Wave of Regulatory Innovation for SFDR

The simplified rules, central to the Commission’s proposal for sustainable financial products, suggest a new holistic approach to the Regulation that significantly differs from its current state. Section 5 from the Proposal presents the availability policy options by identifying three main areas requiring substantial transformations and offering two different possible options for each one of them, which are summarized below:

• Entity-Level Disclosures

Option 1.1: This option includes a significant reduction in entity-level disclosure obligations by (1) focusing only on the most comparable, measurable and material sustainability KPIs, (2) reducing reporting frequency to up to three years instead of annually, and (3) potentially revising the scope to target meaningful entities based on assets under management rather than number of employees.

Option 1.2: The second option suggests to discontinue SFDR’s entity-level disclosures and rely solely on the CSRD to prescribe entity-level sustainability reporting for financial market participants. The mandatory reporting will no longer apply to FMPs below 1,000 employees following the Omnibus proposals, and FMPs outside the CSRD scope could voluntarily report entity level information according to the ESRS or the future voluntary sustainability related information standard.

• Product-Level Disclosures

Option 2.1: In this first scenario, the majority of disclosure requirements set out in the current SFDR Level 2 Delegated Regulation with reporting templates remaining largely similar to today and requiring transparency around the same wide range of ESG-related concepts for all products in scope.

Option 2.2: The second alternative significantly reduces product-level disclosures by moving away from standardized questions for all ESG products to much shorter consumer-facing templates, limited to two pages and specifically designed for individual product categories. Those would once again focus on fewer indicators that are relevant for investors’ decisions and relying on clear, measurable concepts rather than the currently complex high-level concepts.

• Product Categorization

Option 3.1: The first proposal envisions the establishment of three new voluntary categories – (1) “Sustainable” (investments contributing to sustainability goals meeting specific standards), (2) “Transition” (investments in companies on credible transition paths), and (3) “Other ESG” (investments applying credible environmental or social approaches). Those would be introduced under Articles 7, 8 and 9 and each one of them would require 70-80% portfolio alignment, as well as mandatory exclusions based on EU Climate Benchmark criteria. In addition, strict limitation on ESG claims in names and marketing would be introduced for non-categorized products.

Option 3.2: The alternative option suggest the creation of only two new categories – sustainable and transition, which would have the same criteria as presented in Option 3.1. This would result in a narrower categorization system covering only the most ambitious ESG products, without the ability to comprehensively link categories to marketing communications, naming and distribution rules due to the limited scope.

Additionally, the new product categorization options propose removing the definition of “sustainable investment” currently part of Article 2(17) from SFDR, along with the existing “do no significant harm” (DNSH) principle and “good governance” requirements. All of those would be captured through the new mandatory exclusions.

What would be a foreseeable result?

The Commission’s detailed conclusion included in the final proposal published on November 20, focuses on a combination approach most closely aligned with Options 1.2, 2.2, and 3.1. This blend would include the removal of entity-level PAI disclosures for most participants, the simplification of product-level disclosure templates, limiting them to two pages, and the introduction of three new voluntary product categories under Articles 7, 8, and 9 with 70-80% investment thresholds and mandatory exclusions. While these new regulatory requirements might seem quite ambitious, they clearly demonstrate the EU Commission’s determination to maintain robust investor protection through the new categorization framework, while reducing costs and administrative burden for all FMPs.

Next Steps on EU-level

The Commission’s publication initiates the standard legislative procedure, which follows with negotiations between the EU Parliament and Council. In parallel, the Commission will develop delegated acts specifying disclosure templates through consultations with the Member State Expert Group on Sustainable Finance, the ESAs. The process would also involve consumer testing. While it is currently not possible to predict the exact timelines, the new SFDR 2.0 will probably come into force not before the end of 2027 or in 2028.

Next Steps for Your Organization

As outlined above, this current announcement is still a proposal and no official Regulatory changes will follow before the complete legislative procedure is completed. At the same time, it is advisable to review your existing fund strategies against the new categories, and possibly start engaging with investors to understand their categorization expectations, and analyze the impact of possible mandatory exclusions on your portfolios. Being proactive and planning ahead will prepare your organization for a smoother transition. And by engaging with cleversoft’s reporting services you will gain a trustworthy partner who will assist you every step of the way and make the process smooth and tailored to your specific needs.

Get in touch directly and visit our SFDR Service page to learn how we can support your compliance efforts and boost operational efficiency.