The European Commission has introduced a sweeping proposal to amend the Sustainable Finance Disclosure Regulation (SFDR), aiming to streamline the regulatory regime for sustainable-finance products across Europe.

Under the proposed reforms, the Commission seeks to reduce complexity and compliance burdens by:

• Eliminating entity-level disclosures on principal adverse impacts for most financial market participants, to better align with the Corporate Sustainability Reporting Directive (CSRD).
• Shifting SFDR’s focus primarily to product-level transparency, rather than firm-wide sustainability impacts.
• Introducing a new three-category taxonomy for ESG products: “sustainable”, “transition”, and “ESG basics”, with minimum portfolio alignment thresholds (e.g., at least 70 % of assets matching the declared strategy).
• Anti-greenwashing measures requiring products using ESG branding to exclude exposures in sectors such as tobacco, prohibited weapons or fossil-fuels above set limits.

The Commission argues that the changes will make sustainability claims clearer and more meaningful for retail investors, improve the competitiveness of the EU’s financial sector, and reinforce Europe’s role as a leader in sustainable finance.
However, the proposal still requires negotiation with the European Parliament and member states, which means the final regulatory contours may shift before adoption.