Changes Coming to EU Sustainable Finance Regulation

On November 20, 2025, the European Commission (EC) published its proposed revisions to the Sustainable Finance Disclosure Regulation (SFDR). Since its implementation in 2021, SFDR has provided transparency for sustainability-focused investment products to help prevent greenwashing.

In 2023, the EC began reviewing the SFDR to address various criticisms regarding the interpretation of its obligations and the use of SFDR as a labeling regime for financial products, for which it was not intended. Additional criticisms include the financial burden of compliance for market participants and inadequate investor protection.

In keeping with the EC's simplification initiatives, the proposed revisions to SFDR aim to simplify disclosures and introduce a clear product categorization system. This includes removing entry-level disclosure requirements for principal adverse impact (PAI) indicators to avoid overlaps with the requirements contained in the Corporate Sustainability Reporting Directive (CSRD), so that only large financial market participants (FMPs) under CSRD will need to disclose their adverse impacts. They also include a reduction in product-level disclosures to include only data that is available, comparable, and meaningful. Finally, a categorization system for sustainable financial products will include “sustainable,” “transition,” and “ESG basics” categories to help investors better understand the level of sustainability ambition of investments.

Strengthening Stewardship and Clarifying Product Categorization

In February 2026, ShareAction, an independent London-based charity advocating for responsible and sustainable investment, published SFDR 2.0: Reinforcing stewardship to support a credible sustainable finance framework, a policy brief responding to the EU's proposed revisions to SFDR. ShareAction's brief contains two major policy recommendations.

Embed and strengthen stewardship elements across the SFDR framework. According to ShareAction, stewardship is a critical tool for market participants to influence behavioral change in companies through engagement, exercising voting rights, and filing shareholder resolutions. Effective stewardship supports strong financial returns for companies and helps to ensure environmental and social outcomes that are in the interest of stakeholders.

However, the EC's proposed revisions treat stewardship as an optional engagement strategy at the “transition” product category only, which ShareAction believes risks diluting their impact. Moreover, the EC also proposes removing entity-level disclosures, which would eliminate PAI reporting and disclosures on engagement and due diligence policies.

In an interview with 3E, ShareAction's senior EU policy officer Isabella Ritter said that entity-level disclosures are a critical component in giving stakeholders the opportunity to assess sustainability performance holistically across the organization.

“Consumers and investors should still have access to firm-level disclosures,” said Ritter. “Stewardship strategies and policies are typically developed at the firm level and underpin the product level. Providing visibility on firm-wide policies helps ensure there are no conflicting stewardship practices between the product and entity level.”

ShareAction proposed that financial market participants should have mandatory disclosures on their websites, including a description of their stewardship policy, a limited set of the most relevant PAI indicators, and a description of the methodology for identifying and prioritizing PAIs.

“Engagement should be a cross-cutting strategy across all product categories,” said Ritter. “It's an achievable requirement that can help to ensure companies included in those funds are on a path toward a sustainable transition. If a product makes sustainability claims, those claims should be backed by credible stewardship, engagement, and voting practices, otherwise it risks being sustainable in name only.”

Set robust requirements underpinning the product categorization system. While ShareAction welcomed the introduction of a product categorization system for sustainable financial products, it noted that weak or unclear criteria could enable greenwashing and allow products to qualify as sustainable despite limited sustainability ambition.

ShareAction therefore proposed that SFDR should depart from the menu of optional criteria and instead provide a fixed set of core requirements across all product categories, with a limited set of PAI indicators that apply to all financial products.

The proposal also included a call to increase the current threshold of 15% alignment with the EU Taxonomy for Sustainable Activities to 20% for the “transition” category – increasing to 25% after a future review – and 25% for the “sustainable” category, rising to 30% after the same future review.

ShareAction also proposed clear exclusions for each category to ensure that products marketed as sustainable do not contain activities that are not considered sustainable, such as fossil fuel expansion.

“The criteria should be strengthened, particularly for the “transition” and “ESG basics” categories,” said Ritter. “When it comes to exclusions, for example, we think fossil fuel expansion shouldn't have a place in sustainable products. When consumers buy a product marketed as being sustainable, there shouldn't be anything related to new fossil fuel projects in there.”

Looking Beyond the Chaos of Omnibus I

Despite the pitched political battles over the Omnibus I in 2025, Ritter said that proposed revisions to SFDR are less likely to prompt the same reactions.

“I think there is a desire to set the Omnibus discussions aside and have more constructive and genuine discussions around traditional ways of shaping EU legislation at the technical level,” said Ritter. “There seems to be an effort to move away from the political drama and get back to the actual legislative work. Hopefully, EU decision makers will have more constructive discussions on this one.”