Europe's Sustainable Finance Rules Fall Short on Engagement

The European Union’s (EU) proposed revisions to the Sustainable Finance Disclosure Regulation (SFDR) are intended to provide greater transparency and clarity for investors in sustainable financial products. However, advocates say that without mandatory engagement strategies, disclosures could have limited meaningful impact.

The European Commission (EC) has been reviewing the SFDR since 2023 to address criticisms that it was being used as a labeling regime for financial products contrary to its original purpose, imposed a compliance burden on companies, and provided poor consumer protection.

As part of the ongoing revision process, the European Parliament has published its draft report. Rapporteur MEP Gerben-Jan Gerbrandy’s proposals will form the basis for Parliament's negotiations on the EC’s proposed updates from November 2025, which include limitations on requirements for principal adverse impacts (PAI) indicators, reductions in product-level disclosures, and a categorization system for sustainable financial products that includes “sustainable,” “transition,” and “ESG basics” categories to give investors a better understanding of each investment's level of sustainability ambition.

Rapporteur Sees Commission’s Proposal as a Starting Point

In the explanatory note to the report, the rapporteur said the Commission’s proposal represents “an excellent starting point to create a better sustainable finance framework in the European Union.” At the same time, the rapporteur also said the proposal requires improvements in transparency, effectiveness, and burden relief.

Transparency: The rapporteur made three recommendations related to the transparency of the financial products' ESG conditions.

First, financial products that cannot be categorized under the SFDR should be able to include a disclaimer that the product does not meet the EU standards for defining sustainable products, which would mitigate the risk of greenwashing by making it clear to investors that the product is not SFDR-compliant.

Second, there should be a limited set of mandatory PAI indicators to enhance the comparability of categorized products.

Finally, market participants offering SFDR-compliant products should describe their sustainability-related engagement strategy and how it is implemented in alignment with the objectives of the product. If they do not have such a strategy, they should explain why that is the case.

Effectiveness: The rapporteur proposed three amendments to improve the effectiveness of sustainable investment.

First, the “ESG basics” category should require investments to “outperform the average investment universe, reference benchmark, or average rating after eliminating at least 20% of the lowest values for the chosen indicators or ratings.”

Second, the safe harbors for climate-transition benchmarks in the “transition” and “sustainable” categories should be removed as the link to other EU legislation exists when requiring the same conditions on exclusions for all investments.

Finally, the safe harbor for products in taxonomy-aligned economic activities should increase from 15% to 20%.

Burden relief: In accordance with the commission’s proposal, the rapporteur proposed the removal of entity-level reporting.

Disclosure No Substitute for Engagement

Soon after the release of the commission’s proposed revisions in 2025, ShareAction, an independent charity based in London and focused on advocating for responsible and sustainable investment, published SFDR 2.0: Reinforcing stewardship to support a credible sustainable finance framework. This policy brief responded to the commission’s proposals with two major policy recommendations.

First, ShareAction proposed embedding and strengthening stewardship practices across the SFDR framework to support strong financial returns for companies and environmental outcomes for stakeholders. In response to the Commission’s proposals that stewardship be an optional engagement strategy only at the “transition” product category and the removal of entity-level disclosures, ShareAction recommended that engagement be a cross-cutting strategy across all product categories and that investors should have access to firm-level disclosures.

Second, ShareAction proposed a fixed set of core requirements applicabl across all product categories and a limited set of PAI indicators in all financial products. It also proposed increasing taxonomy alignment from 15% to 20% and a clear exclusion of fossil fuel expansion from products listed as sustainable.

In a statement provided to 3E, senior EU policy officer at ShareAction Isabella Ritter noted that the draft report did not make engagement strategies a mandatory feature of the product categorization framework. Instead, they are included as a disclosure requirement for categorized products on a comply-or-explain basis. She also noted that the fossil fuel exclusion for new projects has been maintained in the “sustainable” and “transition” categories, but that entity-level disclosures were not introduced, meaning retail investors and consumers would not have access to firm-level information on sustainability and performance beyond risk exposure.

“Today’s draft report sends a clear signal that engagement matters, by requiring categorized products to disclose an engagement strategy,” said Ritter. “Engagement is one of the most effective tools for steering investee companies towards sustainable pathways. However, disclosure alone risks becoming a box-ticking exercise, with financial market participants being able to justify the absence of a strategy on a comply-or-explain basis. To have a meaningful impact, engagement should become a core element across the product categorization system, particularly within the transition category.”