EUROPEAN COMMISSION

Brussels, 20.11.2025

SWD(2025) 838 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

accompanying the

Proposal for a Regulation of the European Parliament and of the Council

amending Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR), Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) and repealing Commission Delegated Regulation (EU) 2022/1288

{COM(2025) 841 final} - {SEC(2025) 841 final} - {SWD(2025) 839 final}

Table of contents

1.INTRODUCTION: POLITICAL AND LEGAL CONTEXT

2.PROBLEM DEFINITION

3.WHY SHOULD THE EU ACT?

4.OBJECTIVES: WHAT IS TO BE ACHIEVED?

5.WHAT ARE THE AVAILABILITY POLICY OPTIONS?

6.WHAT ARE THE IMPACTS OF THE POLICY OPTIONS AND HOW DO THEY
COMPARE?

7.PREFERRED COMBINATION OF POLICY OPTIONS

8.HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?

Annex 1: Procedural information

Annex 2: Stakeholder consultation (Synopsis report)

Annex 3: Who is affected and how?

Annex 4: Analytical methods

Annex 5: Competitiveness check

Annex 6: Interactions between the SFDR and the sustainable finance and broader corporate sustainability framework

Annex 7: Additional background on specific sectors or investments

Annex 8: Additional information and illustrative examples of potential criteria and disclosures (option 3.1 and 3.2) and approach to estimation

SECTION 1: UNDERLYING CRITERIA FOR THE CATEGORIES PROPOSED UNDER OPTION 3.1 AND 3.2

SECTION 2: UNDERLYING DISCLOSURES FOR THE CATEGORIES PROPOSED UNDER OPTION 2.2

SECTION 3: SUGGESTED APPROACH TO ESTIMATION

Annex 9: Examples of existing ESG labelling regimes and ESG rules by NCAs or label providers

Annex 10: Findings from consumer testing studies

Annex 11: Evaluation

Annex 12: SME check

Glossary

1.INTRODUCTION: POLITICAL AND LEGAL CONTEXT

This impact assessment concerns a proposed initiative to review Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR) 1 . 

1.1.Political context

The European Union is committed to meet the needs of the present without compromising future generations, with sustainability at the heart of these efforts. In this vein, the European Union established the legal objective of becoming a climate-neutral and climate resilient continent by 2050 in Regulation (EU) 2021/1119 on the European Climate Law, and it also committed to deliver an environmental transition supported by an innovative and circular economy, where biodiversity and ecosystems are protected and restored, and where pollution and environment-related health risks are reduced to the minimum as well as to meet the UN Sustainable Development Goals (SDGs) by 2030 2 .

The EU estimates that to meet the objectives of the European Green Deal and RepowerEU alone, additional investments of about EUR 620 billion annually between 2023 and 2030 will be needed, which amounts to 3.7% of the EU’s 2023 GDP 3 . The bulk of these will need to continue to flow from private sources, also building on efforts to ensure deeper and more integrated EU capital markets 4 . As a response to market demand and reflecting that achieving EU sustainability goals requires significant investments, with the bulk of it being provided by private financing, the European Commission introduced ambitious sustainability rules in financial services in recent years 5 , building up the Sustainable Finance framework that includes the SFDR.

Applicable since March 2021, the SFDR was one of the first pieces of the EU Sustainable Finance framework. The SFDR is a disclosure framework which sets detailed sustainability disclosures for financial intermediaries and financial products regarding Environmental, Social and Governance (ESG) factors. Its objective is to increase transparency, combat greenwashing and protect end-investors by ensuring that financial market participants (FMPs) and financial advisers substantiate their ESG disclosures. The latter are required to ensure appropriate sustainability information to investors on their websites and in pre-contractual and periodic disclosures for financial products.

The Regulation rests on two pillars. First, it requires entity-level disclosures, namely for FMPs and financial advisers to explain how they integrate ESG considerations into their internal procedures, including their due diligence processes and consideration of responsible business practices. A crucial element is the introduction of the concept of double materiality, meaning that FMPs must not only consider sustainability risks (i.e. risks to their operations) but must also assess the impact of their investment decisions on the environment and society.

Second, as regards product-level disclosures, the SFDR encompasses a broad range of financial products including investment funds, insurance and pension products, requiring those within its scope that promote sustainability characteristics to be substantiated with accompanying disclosures. The SFDR in its Article 8 establishes that, for products that promote environmental or social characteristics, FMPs must show how the characteristics are promoted and met. Furthermore, in accordance with Article 9 of the SFDR, for products that have sustainable investment as their objective, FMPs must explain the sustainable objective and show how the objective is attained. Finally, for all products in the scope of the SFDR, under Article 6, FMPs must disclose how sustainability risks are integrated in the investment decision process and the results of the assessment of the likely impacts of sustainability risks on the returns of the products, where relevant, or explain why this is not the case. Double materiality also applies at product level. The responsibility for supervising these disclosures lies with the National Competent Authorities in each EU Member State while the European Supervisory Authorities (ESAs) play a coordinating role.

The SFDR and other pieces of sustainable finance legislation have had broad-reaching effects on the market. According to the Platform on Sustainable Finance (PSF) 6 , a Commission expert group, the market development of funds that make claims in regulatory filings to be sustainable has been very sizeable in the EU since the SFDR was launched in 2021, clearly outpacing until 2023 the development of funds not stating to be considered sustainable 7 . Products disclosing ESG information under SFDR account for almost 50% of EU Assets under Management, representing more than 60% of EU funds: funds that promote ESG characteristics (in accordance with Article 8) accounted for 57.6% as of June 2024, while funds that have sustainability as one of their investment objectives (in accordance with Article 9) represented 3.4% of EU funds 8 . Europe is by far the largest market for such funds, accounting for up to 84% of global sustainable fund assets 9 .

The Political Guidelines of the European Commission for 2024-2029 have reaffirmed that the EU will stay the course on the goals set out in the European Green Deal and aim to further scale-up sustainable finance in support of this as part of deeper more integrated capital markets. The focus is now also on simplification: reducing administrative burdens linked e.g. to sustainability reporting, with simpler rules, and better enforcement. In this context, it is important to consider whether the SFDR can be made more efficient, in line with these political priorities and policy objectives, and in the context of overarching efforts to improve the integration of EU financial markets to support productive investments 10 . A review of the SFDR is also foreseen in Article 19 of the Regulation.

The need for simplification in the field of sustainability reporting and due diligence was highlighted as well in the report “The future of European competitiveness” by M. Draghi, which underlined that excessive regulatory and administrative burden could hinder the competitiveness of EU companies compared to those from other blocs. According to the report, parts of the EU sustainable finance framework entail a major compliance cost for companies in the EU.

The evidence gathered to date as part of the review under Article 19 of the Regulation on the implementation of the SFDR signals that, while its objectives remain broadly supported, it is widely seen as a complex and costly regime 11 . There have been calls for significantly simplifying and reducing the administrative burdens linked to the rules 12 . The SFDR review has therefore been included among the simplification initiatives of the European Commission in the Mission Letter to the Commissioner for Financial Services and the Savings and Investments Union 13 and in the 2025 Commission Work Programme 14 .

1.2.Legal context

The SFDR is supplemented by Commission Delegated Regulation (EU) 2022/2018 15 , published in April 2022 and amended in February 2023, with regulatory technical standards specifying key elements of the disclosure regime, notably in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports.

It should also be noted that the SFDR interacts with ESMA’s Guidelines on funds’ names using ESG or sustainability-related terms 16 . The guidelines stem from the strong demand in recent years for investment funds that incorporate ESG factors and the competitive market pressures for asset managers to include terminology in their funds’ names to attract investors which caused concern in ESMA over heightened greenwashing risks: i.e. that funds would be named as green or socially sustainable, while commensurate sustainability standards are not met.

Further, the SFDR interacts with the other pieces of legislation of the sustainable finance framework, including the EU Taxonomy 17 , EU Benchmark Regulation 18 , Corporate Sustainability Reporting Directive (CSRD) 19 , the Corporate Sustainability Due Diligence Directive (CSDDD) 20 , as well as relevant parts of the Markets in Financial Instruments Directive (MiFID II) 21 and Insurance Distribution Directive (IDD) 22 and links with the Shareholder Rights Directive (SRD) 23 . Together, they help support companies and the financial sector in directing private funding into sustainable investment projects and technologies. In particular, reporting obligations for FMPs under the current SFDR largely depend on the reporting obligations for companies under the CSRD and the Taxonomy Regulation. Therefore, the review of the SFDR will duly take into consideration the changes introduced by the proposed ‘Omnibus’ simplifications regarding sustainability information from companies 24 . Annex 6 describes in detail the interactions between the SFDR and the rest of the framework and highlights the special considerations regarding these interactions for the review.

2.PROBLEM DEFINITION

The SFDR sets a series of entity level disclosure requirements for financial market participants and financial advisers. They must disclose how they integrate sustainability risks into their investment decision-making processes (Article 3) and remuneration policies (Article 5). Large firms (more than 500 employees) must also disclose how they consider the principal adverse impacts of their investment decisions on sustainability factors, while others are subject to a comply or explain approach (Article 4).

The SFDR also sets a series of product level disclosure requirements. All financial products in scope 25 must disclose whether and how they consider sustainability risks (Article 6). Financial products promoting environmental or social characteristics (Article 8) or those with a sustainable investment objective (Article 9) must provide detailed sustainability-related disclosures in their pre-contractual and periodic reporting (Article 10) as well as on their website (Article 11).

The SFDR also provides a definition for the concept of ‘sustainable investment’ (SI), which underpins the Article 9 disclosures (and the Article 8 disclosures to a lesser extent). It is defined as an economic activity that contributes to an environmental or social objective, provided that such investments do not significantly harm (DNSH) any of those objectives and that the investee companies follow good governance practices. Importantly, the DNSH is based on the ‘consideration’ of a number of principal adverse impact indicators (PAIs) provided in Annex I of the delegated regulation.

The assessment carried out for the review of the underlying drivers behind the problems associated with the SFDR is explained in detail in Annex 11 (Evaluation). On this basis, four regulatory problem drivers were identified:

First, the Sustainable Finance Disclosure Regulation (SFDR) has faced widespread criticism for being unclear, complex, and difficult to implement, particularly regarding sustainability-related concepts and disclosure requirements. A key issue is the definition of "sustainable investment," which includes complex criteria and lacks clarity, especially in relation to the "do no significant harm" principle. Uncertainty also surrounds what constitutes the "promotion" of sustainability characteristics and how to apply entity- and product-level disclosures on principal adverse impacts. These challenges create ambiguity for financial market participants (FMPs), who must navigate unclear requirements and undefined terms. Additionally, the disclosure obligations are often lengthy, overly technical, and lack comparability, reducing their value for end-investors and undermining efforts to combat greenwashing.

Second, another significant problem stems from legal misalignments between the SFDR and other EU sustainable finance legislation, such as the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy, and MiFID/IDD. These frameworks are meant to work together, but inconsistencies in legal definitions and technical requirements create confusion and hinder legal certainty. Notable discrepancies exist in how sustainability is defined across the SFDR, the Taxonomy Regulation, and the EU Climate Benchmarks, leading to fragmentation and implementation difficulties.

Third, the lack of reliable and comprehensive ESG data further hampers effective disclosures. FMPs and financial advisors rely on sustainability information from issuers, but such data is often incomplete or unavailable. This data gap results partly from inconsistencies across the legislative frameworks and from limited ESG disclosure obligations for assets not covered by EU rules, especially those located outside the EU.

Finally, the SFDR’s disclosures —Articles 6, 8, and 9—are frequently misused as de facto labels by FMPs, investors, and distributors, despite the regulation not being designed as a labelling framework and lacking harmonised standards. This leads to confusion and inconsistency in their use and interpretation.

As summarised in the conclusion of Annex 11, there are a number of root causes for these problem drivers, for a framework which has been in application for only a relatively short period of time, and which inform the lessons learned for the review. Different dates of application for the Level 1 and Level 2 implementing measures of the SFDR 26 created uncertainty around the key requirements and concepts of the SFDR from the outset 27 . Challenges in accessing ESG data needed to comply with the new requirements were present from the beginning, exacerbated by the way the SFDR began to apply before other parts of the sustainable finance framework, namely the CSRD and EU Taxonomy, which were intended to increasingly inform product disclosures under the SFDR. Throughout, it also became increasingly evident that investors were not well served by the new, lengthy and complicated disclosures and rules, something which contributed to markets adopting the main disclosure Articles 6, 8 and 9 as a short-hand, misleading technique to convey a high-level sense of diverse products’ key features 28 .

2.1.What are the problems?

Against this background, it is useful to make a distinction between problems which have resulted for preparers of the SFDR disclosures (i.e. financial market participants) on the one hand, and users of the SFDR disclosures (end-investors and distributors) on the other.

Problems for FMPs, from a preparer perspective: FMPs are facing difficulties in coping with the lengthy and complex disclosure requirements detailed in the Level 2 Regulation, and in navigating the uncertainty surrounding key sustainability-related obligations and concepts. These lead to high undue burdens and costs which can negatively affect FMPs’ ability and willingness to develop ESG products 29 (compared to the absence of such requirements for non-ESG products).

Problems for investors and distributors, from a user perspective: investors and distributors cannot easily understand or compare ESG claims made by preparers of financial products as per the above, creating misinterpretation and misrepresentation risks, which are being exacerbated by the misuse of the disclosure regime as a de facto labelling system despite the lack of common criteria that could be fit for this purpose.

2.1.1.Specific problems from a preparer perspective

FMPs are struggling to cope with the lengthy and complex disclosure requirements and face uncertainty about SFDR compliance.

First, FMPs are facing difficulties in accessing the necessary data from underlying investments 30 . They often struggle to collect, measure or quantify certain indicators to comply with their reporting obligations (described in section 2.2.). 98% of FMPs who responded to the public consultation (176 out of 180) stated facing difficulties in obtaining good-quality data 31 .

This is partly due to misalignments in scope between the SFDR and the other sustainable finance rules, and the fact that FMPs invest a large portion of their portfolio in assets that are not subject to EU legislation. As explained in the evaluation, Annex 11 (and Annex 6 on the different pieces of the sustainable finance framework), CSRD and EU Taxonomy Regulation disclosures were supposed to feed into the SFDR reporting requirements (i.e. ensuring that FMPs are receiving high quality and publicly available ESG data from their underlying investments). However, the scope of assets included in FMPs’ portfolios is much larger than the respective scopes of the CSRD and the EU Taxonomy 32 . As a result, FMPs are not getting public information for certain EU assets (e.g. small non listed companies) and for their investments outside the EU.

To illustrate this point, between 30% and 50% of the average holdings of EU asset managers consist of entities not subject to CSRD reporting requirements (and therefore do not publish Taxonomy or CSRD related sustainability data) 33 . For example, the Platform for Sustainable Finance (PSF) highlights the lack of Taxonomy reporting outside of the European Union 34 and shows that PAI data is not universally available, despite several indicators. The evidence showed in the evaluation, Annex 11, boxes 12 and 13 shows that companies in the sample (12,000 issuers) were largely able to report data for over half of the mandatory PAIs. However, no single issuer reported data across all indicators. In addition, the evidence shows that the data availability for mandatory PAIs varies widely depending on the indicators and on the type of companies. For example, the SFDR mandatory environmental PAI coverage for small and medium EU companies is close to 0%, and the one of large EU companies is about 30 to 40%. Further, some indicators are being reported by less than 10% of issuers, such as the PAI on biodiversity, water, violations of the UNGC principles ad OECD Guidelines for SMEs, and gender pay gap.

As a result, FMPs often source the missing data either internally or commercially from third party providers 35 . The over-reliance on the use of estimates, coupled with the lack of guidance on how to produce such estimates and the lack of regulatory framework on third-party providers of such estimates, results in additional operational, regulatory and reputational risk for FMPs.

In addition, FMPs are facing difficulties in applying the complex and sometimes mis-aligned sustainability-related concepts underlying the disclosure requirements 36 . The bulk of the complexities (as described in the evaluation annex 11 section 3.1) comes from the multiple layers of the sustainability assessment introduced by the definition of sustainable investment (Article 2(17) SFDR) as well as several misalignments between the SFDR concepts and sustainability-related concepts defined under other pieces of the sustainable finance framework (e.g. the EU Taxonomy and the EU Climate Benchmarks) 37 .

As a result, FMPs pointed to several operational difficulties when applying certain SFDR concepts. For example, 80% of FMPs that responded to the public consultation stated facing uncertainty and methodological challenges with the requirement to ‘take into account of’ the principal adverse impact (PAI) indicators established in the Level 2 Regulation at entity level for the ‘do no significant harm’(DNSH) test at product level 38 . Stakeholders also flagged difficulties when applying the Taxonomy-related concepts or the EU Climate Benchmark due to misalignments and legal uncertainties regarding the status of investments in taxonomy aligned economic activities and of products tracking EU climate benchmarks under the SFDR.

The problems mentioned have been notably acute for FMPs active in the pension and insurance sectors. Pension products, schemes and insurance-based investment products are covered the SFDR disclosures, yet some of the main assets they invest in (i.e. including sovereign debt), maintained for regulatory and diversification purposes, cannot be easily assessed against specific metrics in the SFDR and broader ESG framework (i.e. principal adverse impacts, taxonomy-alignment, etc). This, coupled with data availability issues, has led to difficulties for them to align their portfolios with the defined sustainability concepts (i.e. taxonomy-alignment or sustainable investment), hindering these FMPs from providing an accurate picture of their ESG profile 39 . 

FMPs have also reported barriers to implement strategies linked to transition finance due to the misalignments between the underlying elements of the SFDR sustainable investment definition and the features of transitional investments (more details in the evaluation annex 11).

Finally, FMPs are facing uncertainty about SFDR compliance due to the lack of clarity surrounding key sustainability-related concepts and their interactions 40 . As noted in the evaluation, Annex 11, different interpretations of the regulatory requirements are possible and have led FMPs to adopt different approaches. This is particularly the case for the calculation of sustainable investment exposure, which led to diverging approaches within the market and yielded significantly different outcomes/results (see box 9, 10 and 11 in annex 11 illustrative examples and explanation). 

The ambiguity of the legal text poses difficulties for a uniform interpretation and implementation of the law. While a certain level of flexibility is desirable and necessary for product innovation and to accommodate different ESG strategies and assets, the important differences in FMPs’ implementation approaches have raised doubts concerning the regulatory expectations under the SFDR. In addition, the lack of transparency on the approaches taken and underlying methodologies has created concerns about potential misinterpretation for both investors and distributors/advisers. (see evaluation, Annex 11)

The ESAs and Commission have provided extensive guidance in the shape of Q&As to facilitate common interpretations and practical application 41 . However, this has not prevented some national competent authorities (NCAs) from assuming diverging national supervisory expectations (e.g. what they consider as an acceptable approach to ‘sustainable investment’) and the emergence of additional national requirements (e.g. minimum criteria for communicating on ESG features and ESG national labels). A summary of the different national rules and labels is provided in Annex 9.

As a result, most respondents of the public consultations confirmed that these limitations (i.e. lack of clarity and diverging national supervisory expectations and rules) are currently creating high
levels of legal uncertainty (79%, 233 out of 296) 42 and reputation risks for FMPs and financial advisers (80%, 237 out of 297) 43 .

As a result, FMPs are facing excessive compliance costs and burdens

The complexities of the SFDR concepts and the length of the disclosure obligations are creating considerable burdens on FMPs. The implementation has been reported as very costly, time consuming, and the resources needed have been flagged as disproportionate.

In addition, the lack of clarity of the requirements and the inconsistencies, as well as some overlaps 44 with the rest of the sustainable finance framework is generating additional undue costs and efforts for FMPs 45 . National gold plating measures and diverging national expectations also translate into additional burdens, especially for FMPs marketing products in different member states (need to meet different regulatory expectations).

Finally, the lack of availability/comparability of ESG information from underlying investments on a geographical/jurisdictional basis links with increases in search costs for investors (see next section, thereby undermining their ability to scale their investment strategies internationally.

2.1.2.Specific problems from a user perspective (investors and distributors)

Investors (and distributors) cannot easily understand or compare the ESG features and claims of financial products

First, the length and complexity of the SFDR disclosures have not empowered end-investors (and distributors) to understand and compare ESG features 46 . The information provided to investors at the level of product is ‘not easily comprehensible and demands a high level of familiarity with environmental metrics, performance data and the regulatory framework’ 47 . The SFDR concepts (e.g. ‘taxonomy-alignment’, ‘proportion of sustainable investment’, ‘consideration of principal adverse impact’) contrast starkly with the way retail investors express their sustainability preferences, and many investors do not possess the necessary understanding to interpret such information. This affects their ability to assess the sustainability performance of financial products. Findings from the majority of the EU consumer studies conducted in recent years confirm these statements.

Consumers’ associations also argue that ‘pre-disclosure templates are unnecessarily long and can be very confusing and time consuming for retail investors 48 ’ and ‘and not designed in a way that can be easily understood 49 ’. Certain studies also argue that such ‘overflow of complex disclosures form a barrier to understanding the ESG strategy employed in their investments 50 ’. The findings are summarised in annex 10.

This assessment is reflected in the responses to the public consultation, with 84% (249 out of 296) of respondents stating that the disclosures required by the SFDR are not sufficiently useful to investors 51 . A majority of stakeholders also sees limited usefulness in the SFDR disclosures provided at the level of the entities to end-investors, with only 31% (86 out of 281) of respondents to the public consultation considering them useful. According to EFAMA, retail investors typically focus on disclosures in relation to specific financial products rather than the companies managing these products. Consequently, ‘the demand for entity-level disclosures is relatively low, as (investors’) primary concern lies with the details of the individual investment products themselves’ 52 . 

In addition, the disclosures made under the SFDR often lack comparability 53 . Different interpretations of the regulation have led FMPs to adopt different approaches when applying key SFDR concepts, especially the calculation of sustainable investment exposure (see the illustrative example in the evaluation annex 11 box 11). As a result, products with similar mandates and portfolios will report divergent exposures to sustainable investments depending on the methodology chosen. The lack of transparency regarding the approach taken and the underlying methodologies is making it impossible for end-investors to compare competing products. The discretion in how to consider PAIs also does not ensure comparability, while reporting on products’ Taxonomy-alignment is limited and only gives a partial account of their overall footprint. The reasons underlying the lack of comparability are further described in the evaluation, Annex 11 under section 3.1.1. 

Distributors are facing similar difficulties when having to interpret SFDR disclosures to implement the sustainability preferences rules under MiFID and IDD. Distributors have to provide clients that expressed sustainability preferences with suitable investments that reflect (among others) such preferences. In doing so, distributors have to assess, for each product they distribute, to what target market a given product will be suitable. Their assessments rely, among others, on information disclosed by product manufacturers under the SFDR. These disclosures do not enable them to develop sufficient knowledge of the sustainability profile of the products they distribute, leading to reputational risks and operational costs (to implement additional due diligence processes and checks).

An additional problem for distributors (and ultimately for retail investors) is the lack of sustainability disclosure requirements comparable to SFDR disclosures for several financial instruments as defined under MiFID and PRIIPs that may be distributed to clients with sustainability preferences, such as shares, bonds, and structured notes. This is due to differences in objectives and scope between the SFDR and MiFID (and PRIIP), for instance disclosure obligations under MiFID cover investor protection more generally than those under SFDR or PRIIPs, and due to differences in type of financial product coverage 54 . Stakeholders have flagged that this issue is particularly problematic for structured notes which currently fall outside the scope of the SFDR despite having common features with investment funds, thereby giving rise to a form of regulatory arbitrage.

An additional obstacle to investors’ understanding is that ESG claims in product names and marketing materials do not always accurately reflect the products’ actual ESG objectives or strategies. In fact, the SFDR does not include detailed rules on the extent to which financial products can make references to ESG elements in their names or marketing documentations. These claims are only covered by the high-level requirements under the SFDR Article 13 (FMPs must ‘ensure that their marketing documentations do not contradict the information disclosures’) and MiFID II and IDD (which also provide that all information, including marketing communications shall be fair, clear, and not misleading).

The lack of minimum ESG transparency or performance requirements for making such claims has led NCAs to adopt different national approaches, adding complexity to the different rules and different levels of safeguards against greenwashing. The ESMA guidelines 55 partly addresses this regulatory gap by introducing minimum criteria for funds using certain ESG terms in their names. The guidelines aim to bring clarity for investors amid FMPs’ myriad sustainability claims 56 . However, the guidelines do not cover the entirety of financial products in scope of the SFDR and of the MiFID/IDD sustainability preferences rules. For example, insurance and pension products are not currently subject to similar rules.

End-investors are also being misled by the self-categorisation practices 57  

As described in evaluation annex 11, the SFDR is ‘de facto’ being used as a categorisation/labelling system where products disclosing under Article 8 and Article 9 have been commonly referred to as ‘light green’ and ‘dark green’ products, respectively.

The wide, but unintended, use of SFDR disclosures as product labels by the market gives rise to some concerns. First, the Article 8 category based on the “promotion of environmental or social characteristics” is very broad and lacks minimum quality conditions to serve as a reliable categorisation. Second, the key concepts (e.g. contribution to an environmental or social objective or the DNSH for “sustainable investment”) underpinning Article 9 lack clear criteria leading to divergent interpretations and lack of comparability, linked to the problems above.

The disclosure regimes under Articles 8 and 9 do not have any harmonised criteria that could allow investors (and distributors) to compare the relative ESG performance. This had led to confusion, especially among retail investors, who often assume that products disclosing under Article 9 are fully sustainable and that products disclosing under Article 8 strongly integrate ESG factors, even though this is not necessarily the case 58 .

2.1.3. Consequences

First, the limitations related to the SFDR concepts and disclosures lead to risks of greenwashing and mis-selling of investment products. The low levels of comparability and reliability of the disclosures, the lack of alignment between products’ ESG claims in names and marketing documentations, and the misuse of the SFDR as a categorisation system give rise to risks for investor protection linked to misrepresentation and misinterpretation. This is further impacted by differing supervisory expectations and lack of criteria underlying key sustainability concepts and obligations. These findings are supported by the responses to the public consultations, with 62% (181 out of 292) of respondents claiming that the SFDR has not effectively strengthened the protection of end investors and 81% (237 out of 297) identifying important risks of greenwashing and mis-selling 59 . 

Second, these problems are limiting the EU financial sector’s ability to efficiently allocate capital for Europe’s sustainable prosperity. The lack of clarity and the complexity of the SFDR requirements are currently limiting FMPs’ ability to develop ESG products across the single market without incurring undue costs and burdens. Solutions for investors to effectively channel investments towards projects that advance environmental, social and governance objectives are thus suboptimal or lacking 60 , frustrating the continuing demand on their part for ESG investments. In addition, the fact that the SFDR does not define and adequately integrate the concept of transition finance is hindering FMPs from supporting companies while they pivot towards sustainable practices.

Finally, the current SFDR rules are impacting the international competitiveness of the EU financial sector. Undue costs and burdens associated with the implementation of the complex SFDR disclosure regime risk putting EU market actors at a disadvantage compared to FMPs operating in jurisdictions with lighter requirements. In addition, the emergence of various national requirements in the EU pose barriers to cross-border distribution of financial products and prevent the creating of a true single market for ESG financial products, frustrating the potential of the single market to effectively channel savings towards Europe’s sustainable prosperity.

2.2.How likely is the problem to persist? 

Without EU-level action, it is highly unlikely that the problems identified for FMPs (preparers) and investors and distributors (users) would be tackled in an effective, efficient and coherent way. Difficulties and undue costs would persist for both groups in navigating the complexities and uncertainties linked to the implementation of the SFDR, amid the need to also observe differing relevant national level requirements as well as the ESMA guidelines for funds.

3.WHY SHOULD THE EU ACT?

3.1.Legal basis

The legal basis is the same as for the existing Regulation, namely Article 114 of the Treaty on the Functioning of the European Union, with the objective of establishing and ensuring the functioning of the internal market, in this case for the sale and distribution of financial products with sustainability-related features.

3.2.Subsidiarity: Necessity of EU action

The need for a coherent common framework for sustainability-related disclosures for financial products across the EU was established as part of the original SFDR. The objectives remain fully valid, and enjoy broad stakeholder support 61 . Without effective Union-level action, the problems identified would persist. That is, financial market participants, financial advisers and distributors, as well as investors would continue to face undue complexity in the application of the rules. Excessively lengthy disclosure rules and templates involving sustainability characteristics in the business practices of financial market participants, as well as in the financial products they offer to investors, would remain in place. A high degree of confusion, uncertainty and a lack of comparability would continue to mark the availability of financial products with sustainability-linked features, negatively impacting their credibility and uptake.

To overcome these problems and boost the effectiveness and efficiency of the single market for sustainable finance products, the necessary simplification and adjustment of the existing SFDR framework can only be done in a coherent and effective way at EU level. Addressing the problems and consequences arising from the lack of clarity and comparability in the characteristics of sustainability-linked financial products as well as from the undue complexities posed for the operations of financial market participants cannot be sufficiently achieved by Member States acting independently. To be sure, actions by Member States to address (some of) the identified problems could help act on some of the problem drivers e.g. by overcoming a lack of clarity as regards sustainability-features of financial products through the introduction of, or continued reliance on, sustainability labels at national level. However, although Member States could individually take such action to strengthen the reliability and comparability of sustainability-linked financial products in their national markets, there is a high risk that any measures of this kind would differ between them. This could give rise to further diverging levels of transparency between national markets, growing disparities in investor confidence in ESG products across Member States, risks of more barriers and challenges for cross-border market participants, and further limits to the comparability of products across the single market. Therefore, such actions could, in isolation and potentially conducted in an uncoordinated manner, further fragment the single market for sustainable finance products and fail to address the consequences identified in the previous section in an efficient way.

3.3.Subsidiarity: Added value of EU action

Action at EU level to tackle the identified problems would be conducive to a more harmonised, effective, efficient and coherent outcome across the single market, and in support of the broader strategic objectives of the Union. In contrast to sticking with the status quo and relying on national level actions together with requirements regarding the use of fund names pursuant to the ESMA guidelines, EU level policy measures to address the shortcomings in the current SFDR framework would act on the problem drivers in a comprehensive way. Requirements and disclosures could be simplified across the board, both for the benefit of financial market participants and investors, in a harmonised way throughout the Union. Common solutions to transparency-related challenges regarding access to ESG datapoints could be designed in a way which facilitates the business of financial market participants in an even way across the EU and protects investors, and tackles information asymmetries, equally regardless of which Member State they are located in. National disparities in available levels of information regarding the sustainability-linked features of financial products could thus be addressed to benefit investors more evenly and fairly across the EU, for instance helping overcome wide national differences today in the relative shares of products disclosing under Articles 8 and 9 of the SFDR 62 .

Therefore, effective EU level action to tackle the problems identified in the previous section would be better to help scale up private sustainable finance across the Union. In turn, this could better serve the objective of mobilising funds toward the competitive opportunities in the green transition and other evolving strategic priorities in line with Union objectives. As such, it could ease the pressure off public funds, which are increasingly stretched in terms of competing and new emerging priorities, to finance and catalyse funds towards sustainability objectives. In short, EU level action would boost the proper functioning of the single market for sustainable finance and in addition contribute to improving transparency for investors across the Union to enable their participation in EU capital markets in general, in line with the objectives of the Savings and Investments Union 63 .

4.OBJECTIVES: WHAT IS TO BE ACHIEVED?

In order to tackle the consequences identified in section 2, the initiative aims at pursuing two general objectives, in line with the political guidelines for the current Commission to deliver for Europe’s sustainable prosperity and competitiveness and to unlock private financing and turbo-charge investment as part of deeper and more liquid capital markets 64 . These objectives in turn support investment toward the following Sustainable Development Goals, namely those related to the climate and environment 65 and social progress 66 .

To reach these general objectives, two specific objectives are identified in order to tackle the problems identified in section 2, and notably to help financial market participants and investors to overcome the complexity of the status quo. These in turn fully respect and support the EU Charter of Fundamental Rights.

4.1.General objectives

The first general objective of the initiative is to protect the integrity of the EU single market for sustainable finance by ensuring requirements which mitigate risks of greenwashing, and to better help investors seize opportunities in sustainability-linked financial products. The second general objective is to boost the competitiveness of Europe’s financial sector by ensuring conditions which make business easier and help to deepen our single market for sustainability-linked financial products and thus to efficiently allocate capital for Europe’s sustainable prosperity. Overall, the general objectives of the review are thus conceived to create conditions on both the demand-side and the supply-side to ensure a better use of the potential of the European single market for sustainable finance to contribute to funding the transition towards Europe’s sustainable prosperity and competitiveness.

4.2.Specific objectives

To reach these objectives, and to tackle the shortcomings observed in the status quo, the measures of the review should pursue two specific objectives. The first specific objective is to simplify and reduce the sustainability-related administrative requirements of the framework for financial market participants, as well as to enhance the coherence of the framework for their operational needs. The second specific objective is to improve end-investors’ ability to understand and compare sustainability-linked financial products. The specific objectives of the initiative thus tackle the main problems which have been identified both for financial market participants on the one hand, and for investors on the other, which inhibit their ability to, respectively, design financial products and deploy corresponding investments in an efficient and effective manner toward the EU’s sustainability, competitiveness and other strategic policy goals.

5.WHAT ARE THE AVAILABILITY POLICY OPTIONS?

The available policy options for the review are assessed against the specific objectives identified above. They are analysed in terms of their relative merits in how well they can simplify and clarify the regulatory expectations under the SFDR while enhancing investor protection and improving their ability to understand the ESG features of financial products. The overarching goals of the policy options are to support the scale up of sustainable finance towards Europe’s sustainability and competitiveness goals in the most effective and efficient fashion.

This section is structured as follows. Section 5.1 illustrates the baseline scenario of no change to the SFDR. Section 5.2 considers its repeal. Section 5.3 considers a first alternative area of action, namely options for alleviating the reporting burdens through changes to entity-level and product level disclosures. These changes include both a reduction of data points required as well as a simplification of the sustainability-concepts. Section 5.4 considers a second area of action, namely setting up a clear product categorisation system to address the current misuse of the disclosure articles. Section 5.5 discusses some options discarded at an early stage.

The options in Sections 5.3 and 5.4 relate to one another as follows. The options under Section 5.3.1 to significantly reduce or delete entity level disclosures are distinct. They concern financial market participants’ disclosures at entity-level, regarding their investment decisions and business practices. The options under Section 5.3.2 to make either minimal or more significant changes to sustainability-related product-level disclosures connect closely to the options in Section 5.4 regarding whether and how to set up a categorisation system for those products. The options under Section 5.3.1 could be pursued more in isolation (but coherent with the rest of the EU sustainable finance framework) while those in Sections 5.3.2 would be more difficult to pursue without considering those in Section 5.4. To illustrate, Box 2 shows how the options relate to the problems and specific objectives of previous Sections, while the text below under the options explains further how notably options in Sections 5.3.2 and 5.4 should be pursued more closely together, for a coherent outcome which achieves the objectives effectively and efficiently.

The policy options below focus primarily on the necessary changes to the Level 1 SFDR text. These would need to be complemented by corresponding changes or replacements of the Level 2 Regulation. The policy options are explored to establish all essential features of the disclosures and categories in the Level 1 text, framing the supplementary rules in the Level 2 Regulation (contrary to the current SFDR, which allowed for the elaboration of complex and lengthy level 2 rules, leading to increased complexity and burdens).

Specific considerations for the formulation of policy options arising from the Omnibus proposal 67 , the ESMA fund name guidelines and the principle of proportionality

One of the key considerations is to foster coherence between the SFDR and the rest of the sustainable finance framework, and in particular with the changes entailed by the Omnibus proposals in terms of sustainability disclosures applicable to corporates. The policy options for the SFDR review need to be coherent with this new context. Prior to the Omnibus, disclosures from corporates/investees were set to expand over time and provide a wider range of the granular data needed by financial market participants for their own disclosures. Post-Omnibus 68 , the policy options need to take account of the future scope of the disclosures for corporates, which will not improve FMPs’ ability to access ESG data for their underlying investments. Therefore, the future system should reflect the fact that granular sustainability-related information will not be more readily available directly from all investees. Here, it needs to be carefully considered whether the new context under the Omnibus would favour repealing the SFDR and leaving the organisation of information on ESG-features of financial products to the market, or whether other options to review the SFDR would be more effective, efficient and coherent to deliver on the objectives 69 .

Second, in this context, due consideration should also be given to recognising and building upon current market practices. While not a standalone objective, a sufficient degree of continuity/stability with appropriate criteria in the categorisation of products that are already being applied by the markets, namely reflecting the ESMA fund name guidelines 70 , is considered advisable. These have become a broadly accepted and useful source of clarity for FMPs and investors. Duly reflecting them aims to avoid a ‘re-categorisation’ wave which could be disruptive to the offer of products to investors. It could also be unduly costly for FMPs, especially given evolving data constraints, and be at odds with the overall objective of simplification and burden reduction. Rather, where existing categorisation practices are considered to help support the objectives in Section 4, this should be reflected in the assessment of the relative merits of the options.

Finally, and linked to this, following the principle of proportionality, the options should further seek to work with the grain of market practices and not go beyond what is necessary to reach the objectives, also taking into account other existing regulatory requirements regarding ‘environmental’ claims 71 . While there is no obligation in the current SFDR for FMPs to offer sustainability-linked products, the scope of its current disclosure requirements is not clearly delineated and as a result applies broadly to the market. As explained in section 2 and Annex 11 (evaluation), the scope of application of the SFDR Article 8 has been subject to different interpretations (from FMPs and supervisors), i.e. the triggers of the mandatory ESG disclosures are not clear and led to a very large scope of financial products falling under these obligations (for example investment funds disclosing under Article 8 accounted for about 51% of the total UCITS and AIF fund market at end of 2024 72 ).

In this respect, the options should more clearly focus the obligations under SFDR to cater for FMPs which are committed to offering sustainability-linked financial products and for their clients which are interested in investing in them. That is, compared to the status quo, it should be ensured more clearly that the future policy framework constitutes a voluntary regime for FMPs and investors interested in sustainability-linked products. It would apply only in case of explicit decisions by FMPs to offer ESG-focused products and by investors to seek and select them. A key consideration would be that ‘claims’ by FMPs regarding how and the extent to which financial products invest in, contribute to, or integrate sustainability factors in their investment strategy, understood as any messaging stating or implying environmental or social benefits associated with investments in and by those financial products, would trigger the categorisation of products under the revised SFDR. Conversely, if products do not meet the criteria required by the voluntary categories, they should be restricted from using certain names or be marketed as sustainable or ESG focused.

5.1.What is the baseline from which options are assessed?

The baseline scenario assumes no changes are made to the SFDR and that the Omnibus proposals are adopted by co-legislators 73 . In this scenario, the problems and challenges identified in section 2 would continue. Namely, the complexity, burdens, confusion and suboptimal outcomes associated with the current rules, both in terms of disclosures and the misuse of Articles 8 and 9 as labels, would not be tackled. Questions from FMPs how to interpret and implement the rules would continue, adding extensively to the corpus of Level 3 guidance which they have to observe 74 . Certain duplications within the existing sustainable finance framework for financial market participants would remain in place, and new challenges arising for them from the Omnibus proposals would emerge. Rather than receiving increasingly granular data from investees as would have been the case prior to the Omnibus, FMPs would have to make do with less for their own disclosures 75 , and from a smaller range of entities. In response to a perpetuated status quo, the likelihood of divergent national measures would increase, even more so in case national authorities were to adjust national regimes for financial market participants to reflect the evolving post-Omnibus landscape. Worsening fragmentation of the single market, contrary to the objectives of the Savings and Investments Union, would ensue. The ESMA guidelines could help mitigate this to an extent, continuing to apply to govern the use of ESG terms in fund names. However, tensions could emerge amid a growing disconnect between the simple rules introduced by the guidelines on the one hand, and the complexity of the underlying SFDR disclosures and concepts (e.g. ‘sustainable investment’, which is integrated in the guidelines) amid heightened post-Omnibus data availability challenges on the other.

5.2.Repeal of the SFDR

Given the emphasis on simplification of sustainability reporting under the Omnibus, a straightforward way to simplify and reduce the sustainability-related administrative requirements for financial market participants would be to remove the rules to this effect under the SFDR altogether. If the SFDR were repealed, financial market participants would be relieved of the obligations to provide entity-level and product-level information regarding sustainability involving their practices and products. They would be free to provide this information according to parameters and templates of their choosing, based on demand from their investors, and subject to the (possible, continued) application of the ESMA fund name guidelines (which does not include reporting obligations) and other horizontal legal requirements 76 . However, for a complete answer to the problems identified in Section 2, this would need to be weighed against how well a repeal would help meet the other objectives outlined in Section 4 – e.g. to enhance the coherence of the sustainable finance framework for the operational needs of financial market participants, as well as to improve end-investors’ ability to understand and compare sustainability-linked financial products and fight greenwashing. This is assessed at the start of Section 6.

5.3.Policy options for alleviating burdens and costs of reporting

The first set of alternative options looks at how best to alleviate the entity-level and product-level disclosure requirements applicable to FMPs in the current framework, which constitute one of the key problems identified in section 2.1.1. The options focus on the information and datapoints that are most needed from them by end-investors and on how to clarify and simplify the concepts underlying these disclosures. This involves amendments of the Level 1, to be complemented by corresponding Level 2 changes at a later stage. The approach to supervision would remain the same (i.e. in the hands of the national competent authorities).

The options for the disclosures in this Section are independent of those regarding categorisation in Section 5.4. However, the specific content of the product disclosures would be closely linked to the type of categories that would be created. In fact, disclosures would need to include an indication of the categories, and under some options they would also include transparency regarding the criteria.

5.3.1. Entity-level disclosures

The suggested changes focus on the disclosures of principal adverse impacts under Article 4 SFDR, which are those most acutely identified as a problem in section 2. Disclosures on sustainability risk and remuneration policy under Article 3 and 5 77 were not identified as considerable burdens. Disclosures under Article 4 SFDR are currently mandatory for FMPs with more than 500 employees, while smaller FMPs are subject to a comply or explain mechanism. In terms of coverage of entities, there are currently approximately 400 FMPs 78 reporting on a mandatory basis (i.e. more than 500 employees) and 1200 79  doing so on a voluntary basis (i.e. below 500 employees) 80 .

Option 1.1: Significant reduction of entity-level disclosures

Under this option, the Commission would reduce the amount of sustainability KPIs to focus on the ones that are the most comparable, measurable and material. These would need to be built on what is understandable and important for investors (focus on retail investors) 81 ; as well as on the current market practices 82 and the future corporate reporting standards under the CSRD 83 . Work from the Platform on Sustainable Finance (PSF) 84 , the ESAs 85 , and the responses to the public consultation can inform on the usability of the indicators to be retained. The frequency of reporting could also be reduced up to 3 years instead of every year.

In addition, a revised scope could target a meaningful scope of entities by focussing on the size of the FMPs’ asset under management rather than the number of employees. Regardless of the revision of the scope, this option would involve the SFDR continuing to set entity-level disclosures for smaller FMPs that will be out of the scope of the revised CSRD, as per the Omnibus proposal.

Option 1.2: Deletion of entity-level disclosures

Under this option, the SFDR would solely focus on product disclosures while the CSRD would prescribe the entity-level disclosures for FMPs in its future revised scope 86 . Assuming the adoption of the Commission’s Omnibus proposals, mandatory entity-level reporting would thus no longer apply to FMPs below 1000 employees.

In contrast to option 1.1, this option fully reflects the logic of the Omnibus proposal. The CSRD will determine future entity-level sustainability-linked reporting requirements in a comprehensive, cross-sectoral and coherent way, without exceptions and without scope for additional requirements under other regulatory pieces that would risk duplications or excessive complexity. FMPs outside the CSRD scope could voluntarily report entity-level information according to the ESRS or the future voluntary sustainability-related information standard to be adopted as a delegated act according to the Omnibus proposal, and based on the voluntary standard for SMEs (VSME) developed by EFRAG 87 .

5.3.2.Product-level disclosures

Despite the clear need for simplification and streamlining of the current ESG disclosures for sustainable finance products, there is still a clear demand for ESG information on investment products 88 (summary of the existing consumer studies included in Annex 10). This trend was confirmed in the responses to the public consultations (described in Annex 2) which showed that 89% of respondents (272 out of 304) consider that the objective to strengthen transparency through sustainability-related disclosures for financial products is still relevant today. In addition, a Eurobarometer survey of October 2022 shows that more than six in ten Europeans find it important that their savings and investments do not find economic activities that have a negative impact on the planet. However, only 34% know whether their private savings and investments are invested into sustainable economic activities, and 29% receive information on the sustainability impact of financial products or services 89 .

This shows the need for more user-friendly information for investors to make informed choices. The two options below therefore look at how to best ensure that investors receive the information that they need while limiting the burdens on data preparers.

The specific content of product disclosures is intrinsically linked to the choice made for the categorisation system (section 5.4). Accordingly, option 2.1 would cater more for categories that rely on the existing SFDR concepts while option 2.2 would better reflect categories relying on new criteria (which would be simpler than the existing concepts).

Option 2.1: Minimal changes to product-level disclosures

This option would retain the bulk of the disclosures set out in the SFDR level 2 delegated regulation in place.

The reporting templates would remain largely similar to how they are today, i.e. requiring transparency around a wide range of ESG related concepts in the current SFDR for all products in scope 90 .  Depending on the choice made regarding categories, the specific content of the disclosures would only slightly vary. If categories were introduced, disclosures would need to include a reference to the category and an explanation of the criteria, but all categorised products would continue to disclose against the wide range of ESG concepts, independently of the category under which they fall.

Option 2.2: Significantly reduce product-level disclosures

This option would imply a significant change from the current approach and would result in much shorter and simpler consumer-facing disclosures (Level 2). This option would move away from relying on standardised questions for all ESG financial products but instead would be coherent with the creation of categories, with disclosures tailored to the categories under which products fall (i.e. specific disclosures would depend on whether a product is largely composed of sustainable assets, or transitioning assets, or if the product implements other ESG processes). Accordingly, detailed disclosures would be required only for categorised products and the number of data points to report would be significantly reduced from the 25 currently standardised questions 91 . 

To strike a balance between providing the necessary and relevant information for investors and reducing the burdens for FMPs, the following measures would be taken:

-Refocussing the templates on fewer indicators and sustainability topics which are relevant for investors’ decisions. A limit on the number of mandatory indicators for categorised products could also be defined (e.g. 5 indicators covering investors’ interest in climate, environmental and social issues). The format of the templates would be standardised and its size (which would also include a description of the categories and its criteria) could also be limited to for example 2 pages. A shorter, standardised template focused on fewer indicators would also have the benefit of enhancing product comparability.

-Such disclosures should rely on clear, measurable and usable concepts rather than the currently high-level concepts which have proven complex to apply (such as sustainable investment). FMPs’ experience with sustainability concepts and measures has increased significantly since the SFDR was introduced. Market observations can now inform on which indicators can be comparable across products 92 and which concepts can be properly implemented in a harmonised way. More information on how the criteria would be changed is provided under section 5.4.

-Relying on concepts/KPIs for which information is either available from investee companies or possible to estimate by FMPs/data providers when the information is missing. Two elements should be considered:

oThe SFDR requirements should be aligned with the future corporate reporting standards under the CSRD to ensure that at least EU companies subject to these rules report the necessary information. The revised ESRS standards should be adopted in 2026.

oThe information needed to implement the SFDR should be possible to estimate when the information is not available. A market study would be conducted to understand what type of sustainability data is feasibly possible to reliably estimate  93 . Annex 8 includes background information on the current estimation practices. This is key to avoid that the initiative inadvertently contributes to greenwashing due to an unreliable use of estimates.

Therefore, subject to the decision taken on the creation of categories under section 5.4, the disclosures could be tailored to each category and focus on: (1) compliance by the product with the criteria of the category; (2) the approach to sustainability chosen by the FMP; (3) the underlying methodology used and; (4) a requirement to disclose how the product meets a specified short set of ESG KPIs tailored to each category .

Annex 8 provides for an illustrative example of what the new template would look like. Because this option would introduce considerable changes, the proposed changes should be tested on EU investors once the above essential contours and elements are agreed by co-legislators, before being finalised in the level 2 rules.

5.4.Policy options for setting up a clear and coherent sustainability-linked product categorisation system

To address the problem of poor comparability of ESG products and misuse of the current Articles 8 and 9, three different options can be considered on how to set up sustainability-related categories for financial products. The options discussed in this section reflect those which emerge as the preferred ones from stakeholder feedback, namely different combinations of distinct categories for ‘sustainable’, ‘transition’, and ‘other ESG’ products 94 . Option 3.1 would set 3 new categories (sustainable, transition, other ESG), option 3.2 would set 2 new categories (sustainable, transition), and option 3.3 would convert the existing disclosure Articles 8 and 9 into formal categories (sustainable and other ESG). Based on this stakeholder feedback, other options to either not create categories at all, or to create more than two or three categories are dismissed at the outset (as explained in section 5.5), also given that such approaches are assessed to be suboptimal in meeting the objectives defined in section 4.

Like the current use of the SFDR as a categorisation system, these categories would be voluntary. As explained at the start of section 5 95 , in line with the principle of proportionality, the categorisation caters for FMPs which are committed to offering sustainability-linked financial products and for their clients which are interested in investing in them. However, some of the policy options presented limit the ability of non-categorised products to make ESG claims in marketing documentations and names. Also, the specific content of the disclosures builds on the information provided in Option 2.2 and would be largely defined by the type of category chosen and their underlying criteria.

Under the three options, the categories would be designed in a way that is easily understandable by retail investors and usable by distributors by (1) relying on terms that are understandable to non-experts; (2) reflecting different levels of ambitions/type of sustainability objectives that can easily be explained. The categories would not regulate every feature of products which would fall within them, but rather create certain high level requirements which categorised products would have to meet. They would aim at enabling investors and advisors to easily identify the products that can match certain sustainability preferences, supported by short mandatory disclosures (as per option 2.2 above). This implies that the names of the categories, as well as a short explanation of what the categories are (part of the product disclosures), must be enough for investors to get a clear idea of the (minimum) ESG standards followed by categorised products 96 . In contrast to today, where products can fall under either Article 8 or 9 depending on how FMPs decide to implement the SFDR concepts 97 , the categories would cluster products into distinct groups based on their main claims (‘sustainable’, ‘transition’, ‘other ESG’) and how they meet clear predefined criteria.

There is of course a trade-off between making the categories simple for FMPs and investors on the one hand, and heightened concerns of greenwashing on the other. To achieve the former, the categories should rely on a few key datapoints to cluster products and convey their main ESG features. However, there is a risk that this effort to simplify the framework will not rely on the right data, that is both available and of most interest to investors, or will omit some important environmental or social decision-useful data. In assessing the impacts, it should therefore be ensured that the data that is relied on for the categories is both available to a large degree, possible to estimate without excessive effort in case it cannot be derived directly from investees, and is proven to be the most decision-useful for investors, based on their preferences when investing in sustainability-related financial products. The descriptions of the options in this section and the analysis of section 6.3 (and Annex 8) weigh the impacts in terms of the balance between the expected benefits on the one hand and the costs/risks on the other. The analysis reflects how to best ensure the criteria for the categories support the objectives of the review in section 4 and strike a balance in terms of e.g. competitiveness and simplification objectives, ESG ambition, and issues of data availability and usefulness for investors. 

The approach to supervision would remain the same, i.e. NCAs would remain in charge of supervising the disclosures and would check whether categorised products comply with the underlying criteria of the categories. The ESAs would continue to have a coordinating role and would be in charge of harmonising the supervisory practices/expectations of NCAs to avoid diverging rules or gold plating as much as possible.

Description of the three options

ØOptions 3.1 and 3.2

Option 3.1 and 3.2 both suggest creating categories which would rely on detailed criteria that are different from the current broader disclosure sustainability concepts of Article 8 and Article 9. These new categories would build on existing criteria under the ESMA Guidelines for funds names and current market practices. They would therefore reflect what FMPs have already adapted to and would be simpler, clearer and less data intensive than the current concepts of the SFDR (more details in box 3 below). The only difference between these two options is the number of categories, and therefore the potential coverage of the categorisation system. Both options are based on a voluntary regime, meaning that it applies only in case of explicit decisions by FMPs to offer sustainable, transition (and other ESG) products and by investors to seek and select them. There are restrictions however for products that are outside the categories on how they can be marketed to retail investors or use any relevant terms in the names.

Option 3.1: Three new categories – sustainable, transition, other ESG

To bring clarity to end investors as to which products have a level of sustainability-related ambition which would match their sustainability preferences, this option would establish three categories focusing on commonly encountered ESG/sustainability-related investment features and preferences from consumers (see Annex 10). These would be:

-‘Sustainable’ category: investments that contribute to sustainability goals (such as climate, environment, or social goals) such as investments in companies or projects that are already largely sustainable meeting specific sustainability standards.

-‘Transition’ category: investments in companies and/or projects which are not sustainable yet, but are on a credible transition path, or investments that contribute to transition goals (such as climate, environment or social goals).

-‘Other ESG’ category: investments which do not meet the criteria of the sustainable or transition investment categories but however apply credible environmental or social investment approaches (e.g. process-based strategies, such as the use of ESG ratings or outperforming the investment universe on a specific ESG indicator). Minimum safeguards would also apply to this third category.

Special considerations for the transition category

In contrast to the ‘sustainable’ and ‘other ESG’ categories, which would build on the approaches of Articles 9 and 8 of the current SFDR, an official ‘transition’ category would finally clarify the distinct characteristics of this type of strategies. 98 The concepts and criteria that would underpin this category would reflect current market practices and build on the existing legislative framework for transition products (ESMA guidelines), including existing practices on national supervision of transition plans. This category would not create a parallel definition of transition but would align with criteria developed under the Commission 2023 Recommendation on transition finance 99 and the criteria already mandatory for funds using transition-related terms in their names under the ESMA guidelines 100 . The criteria would also ensure coherence with the EU Climate Benchmarks and potential future regulatory development (e.g. CSRD and the Corporate Sustainability Due Diligence Directive) and would aim at striking a balance to ensure sufficient ambition and comparability on the one hand, as well as inclusiveness and flexibility on the other, allowing funding to flow to a transitioning real economy.

The evaluation annex highlights the challenges arising from the lack of recognition of transition finance under the SFDR despite the existence of many products with transition objectives disclosing under Article 8 and 9. This creates challenges for FMPs wanting to pursue a transition strategy while having to comply with the SFDR underlying concepts  101 , hindering the possibility to conduct and disclose diverse transition-related investment strategies. This leads to confusion and lack of appropriate disclosures for investors interested in investing in products with transitional objectives. The consultation confirmed a large degree of support (72% of respondents) for creating a specific category for transition products, including as an inclusive strategy to focus on efforts to improve companies’ performance regardless of their starting points and to help operationalise the concept of ‘transition finance’, developed under the Commission 2023 Recommendation on transition finance.

Potential role for the categories: Option 3.1 would create a categorisation system that could potentially scope-in a large majority of ESG financial products (due to the third category). Due to this large scope, the categories would play an important role in limiting which products are allowed to make ESG claims in their marketing documentation and in their names. For example, only categorised products could be allowed to use ESG related terms in their names and add ESG elements in their marketing documentations. Categories could also determine which SFDR products could be distributed to retail investors with sustainability preferences aligned with the categories’ criteria (under MiFID and IDD). The third category would ensure that all products making ESG claims (marketing documentations, names, or be distributed as products with ESG features) are regulated and comply with minimum safeguards 102 .

Option 3.2: Two new categories – sustainable, transition

This option would be the same as option 3.1, but without a third category. Option 3.2 would set up two categories: ‘sustainable’ category and ‘transition’ category. These categories would be the same as the ones suggested under option 3.1.

Potential role for the categories: Option 3.2 would create a narrower categorisation system that would only cover the most ambitious ESG products 103 . Instead of dividing the market of ESG products into three clear clusters and ensuring common criteria for all ESG products, the categories would bring visibility to the most ambitious ESG products. Due to the narrow scope, it would not be feasible to link the categories to the marketing communications, naming and distribution rules to the same extent as under option 3.1 (not enough products would be covered). Uncategorised products making ESG claims in marketing communications and names would therefore continue to exist and be available to investors.

Description of the proposed criteria under options 3.1 and 3.2 (to be read in conjunction with box 3 below and Annex 8)

The central SFDR concept, i.e. the ‘sustainable investment’ definition in Article 2(17), builds on three principles: (1) contributing to an environmental or social objective; (2) causing no significant harm to other environmental and social objectives (based on the consideration of principal adverse impacts), and (3) investing in companies with good governance practices. The revised criteria would retain the concept and build on this while improving these core principles by underpinning them with a set of clear minimum requirements.

The evaluation (annex 11) and problem definition (section 2) has identified the lack of clarity linked to the concept of ‘sustainable investment’, which has led to widely different interpretations and implementation approaches amongst FMPs. As shown in box 10 of annex 11, the exposure to sustainable investments of products tracking a similar benchmark can range from 1% to 80%.

The evaluation also finds that the ‘DNSH test’, which is done through the high-level principle of ‘consideration of principal adverse impacts’, has not led to harmonised implementation practices and has not prevented harmful investments. This is mainly because the current SFDR leaves considerable discretion to FMPs in choosing how they consider these impacts.

To remedy this, two criteria for ESG categories are suggested:

ØPositive contribution: Setting a minimum portion of investment to contribute to the sustainability objective (70/80% of the product) 108 –

ØExclusions: Setting clear exclusions of harmful industries and activities in which products cannot invest in – these exclusions would be aligned with the ones of the EU Climate Benchmarks, as introduced by the ESMA guidelines on funds’ names

The changes would aim at simplifying the current framework and:

ØFormalise the categorisation of products and clearly delineate between the different categories, bringing legal clarity to both FMPs and end-investors.

ØIntroduce some common elements to underpin FMPs’ diverse approaches for ESG products, based on data that is available, measurable and possible to estimate, and minimising fragmentation in supervisory practices amongst NCAs.

ØProtect end-investors against misleading claims and increasing the comparability of ESG products.

The main positive impacts of the suggested criteria compared to today’s situation are described in table 1 of annex 8.

High level principles to be reflected in the criteria:

To deliver against the specific objectives of the review, the criteria should reflect the following principles:

ØFirst, the criteria should draw on reliable and comparable sustainability information and take account of the data availability considerations outlined above 109 . The criteria should be designed in a way to mitigate as much as possible the data availability issues and the related greenwashing risks. This can be done by focusing the concepts on information that is available from investee companies in scope of the CSRD (i.e. aligning with the upcoming streamlined ESRS), on information included in widely used or endorsed international frameworks such as the ISSB and the GRI, other emerging voluntary sustainability-related information standards such as the one to be adopted as a delegated act according to the Omnibus proposal, and based on the voluntary standard for SMEs (VSME) developed by EFRAG 110 , and information that is possible to estimate (see below the special considerations for estimates).

ØSecond, the criteria should take into account existing market practices to ensure continuity (especially regarding the criteria introduced by ESMA guidelines on funds’ names). This would allow to lower the one-off implementation costs and ensure regulatory stability 111 . 

ØThird, the criteria should ensure sufficiently high environmental/sustainability ambition, and focus on information shown to be most useful to investors, in order to meet their expectations, mitigate greenwashing risks and respect the precautionary principle. At the same time, the criteria should be achievable by a reasonable portion of current products making quality ESG claims to make sure that the categories do not unduly disrupt practices as explained above 112 .

ØFinally, the criteria would need to enhance the comparability of products and bring sufficient legal clarity in order to harmonise implementation and supervisory practices to the extent possible. At the same time, the criteria would also need to allow for sufficient flexibility for FMPs to fit diverse investment strategies and asset classes (e.g. equities, bonds, indices, etc.).

Additional considerations linked to estimations

Due to data availability issues the use of estimates will be inevitable and is already part of current market practices given that the investable universe for financial products always extended beyond listed and larger EU companies, including non-EU companies and assets that are not covered by EU reporting rules 125 .

The evaluation (Annex 11) identified two shortcomings linked to estimations in the SFDR implementation: (1) the use of estimates is currently unregulated and lacks harmonised guidance; (2) the data required is sometimes not possible to estimate when not disclosed by the company (either due to the nature of the topic/indicator, e.g. board composition, or due to usability issues linked to the specific definition, e.g. emissions to water 126 . These limitations led to greenwashing concerns and lack of legal clarity for FMPs. In contrast, the proposed criteria and exclusions are based on existing market practices, would acknowledge the continued use of estimates, build on findings from market analysis on which indicators are mostly disclosed by companies and of interest to investors, and rely on common metrics which are possible to estimate in a harmonised way. On the other hand, the evaluation does not strongly identify the lack of regulation of data providers themselves as a major shortcoming, nor one which would cohere with the objectives of the targeted review of the SFDR (including in the context of overall simplification 127 ).

The level 1 should thus allow the use of estimates and introduce principles and guidance for this purpose, to mitigate greenwashing concerns and provide certainty for FMPs. Examples of such principles and guidance are provided in Annex 8. Once agreed by co-legislators, together with the main elements and requirements linked to the categories and criteria, the ESAs could be tasked to test and confirm what type of sustainability data is feasible to reliably obtain and estimate (see above ‘Elements to be defined at level 1 vs elements to be defined at level 2’) 128 .

ØOption 3.3: Converting Article 8 and 9 into categories – sustainable, other ESG

As an alternative to options 1 and 2, this option would involve a less far-reaching amendment of the SFDR by transforming Article 8 into an ‘other ESG’ category and Article 9 into a ‘sustainable’ category. There would therefore be no standalone category for transition finance products. Given the option would seek to make minimal changes, the underlying requirements and concepts would remain largely like the ones of the current Article 8 and 9 (with some possible targeted amendments to improve their clarify and usability).

This option would largely affirm the current market practice of treating these two Articles as de facto categories, underpinned by current sustainability concepts (e.g. sustainable investment, DNSH, promotion of environmental and social characteristics etc.). Crucially, there would be no sectoral exclusions like in options 3.1 and 3.2, notably for the ‘other ESG’ category.

Potential role for the categories: Option 3.3 would create a categorisation system that could play a similar role as the one under option 3.1. The difference would be the absence of recognition for transition finance products and the limited changes in the current unclear underlying requirements.

5.5.Options discarded at an early stage

Non-regulatory measures. Further guidance and other soft tools e.g. Q&As are considered insufficient to effectively address the problems identified in section 2, to comprehensively meet the objectives specified in section 4.2 and to respond to stakeholder feedback calling for the creation of clear product categories. Rather, the risks noted in sections 3.1 and 5.1 with the baseline scenario would likely increase (emergence of new national measures to tackle the problems, further fragmentation etc). In this context, effectively prolonging the status quo yet attempting to introduce further guidance to address the identified problems, as well as new ones emerging from the implementation of the Omnibus, would add to the extensive Level 3 guidance already in place. Some guidance could be effectively impossible to provide, in case of new inconsistencies or contradictions between the SFDR and revised CSRD/Taxonomy. As mentioned in section 5.1, the ESMA guidelines could help to an extent in governing the use of ESG terms in fund names and providing stability and continuity to markets. However, tensions could emerge between the (simple, but non-binding and non-comprehensive) guidelines and further additional complexities in underlying SFDR disclosures, going against better regulation principles of ensuring coherence between different policy instruments 129 . This could add to further confusion and compromise any anticipated benefits in terms of meeting the objectives in section 4.2 (i.e. simplify and improve the coherence of the framework for financial market participants as well as improve end-investors’ ability to understand and compare ESG products). It could also generate disengagement among some FMPs, who could potentially withdraw from offering sustainability-linked products.

No category. Proposing that ESG financial products should not be categorised at all could be seen as a simplification on paper, and in some ways a coherent step following the Omnibus. An argument could be made that less ESG data from investees means less scope for creating a meaningful product categorisation under SFDR. However, this conflates the objectives of the Omnibus on the one hand (simplifying excessive sustainability reporting requirements for corporates) and the SFDR on the other (meeting investors’ demand for ESG information regarding financial products), effectively denying the validity of the latter in a post-Omnibus scenario. As explained previously, ESG data for financial products was never only to be derived from (pre-Omnibus) European corporate disclosures. Moreover, the demand among EU investors for ESG information regarding financial products remains strong 130 . Thus, creating categories is arguably a necessary and coherent step following the Omnibus, to convey a high-level message of products’ key features according to a simpler set of key measurable parameters, to compensate for a decrease in detailed constituent ESG data from investees. Providing for no category would also represent a departure from (i) the revealed preference of markets today (in the treatment of Articles 8 and 9 as de facto categories) to distinguish between ESG products, (ii) the preferences expressed by a wide range of stakeholders in the consultation to introduce a proper, clear(er) categorisation 131 , and (iii) the changes which markets have adopted in applying the ESMA fund name guidelines. It would effectively amount to removing any distinction between ESG products (implying amendments to Articles 8 and 9), constitute a major change, and would thus be contrary to the aim of not forcing undue changes on markets which have adapted to the current rules 132 . It could also necessitate yet more extensive ESG disclosures to distinguish between products and to compensate for the lack of a high-level clustering of products according to their key objectives and features. The option is thus dismissed from the outset as an effective, efficient and coherent way of meeting the objectives in section 4.2 (i.e. simplify and improve the coherence of the framework for financial market participants as well as improve end-investors’ ability to understand and compare ESG products).

One category. Alternatively, creating a single category for all products making ESG claims would also represent a further complication and reordering of the market for FMPs and less clarity for investors. To accommodate all potential products, it would run the risk of having to rely on new (broad) concepts, with potentially heavily watered-down criteria and safeguards. As above, the changes from the Omnibus do not in themselves annul investors’ continued interest in receiving more comparable information on the different ESG features of products. Product disclosures could also potentially need to increase to cater for this. Legal certainty would be unlikely to improve, with continued need for further guidance, going against the aim of simplifying and improving the coherence of the framework for financial market participants. Transparency for investors and the quality of products on offer would likely suffer, impairing end-investors’ ability to understand and compare ESG products.

More than three categories. Finally, going beyond three categories could also entail an unduly significant – and unnecessary – reorganisation of the market for FMPs, of questionable added-value for investors. As the number of categories increases, the criteria needed to distinguish between them could become excessively intricate, adding further complexity in a way that would be incongruent with the Omnibus and the added data challenges it brings. There could be a risk that only a few products would ever populate a given category. The Platform proposals confirm the broad stakeholder feedback in favour of a more limited number of categories and find that this would achieve a balance in terms of capturing different products within simple, high-level categories, while allowing for product innovation and diversity targeting different investment strategies and asset classes, as well as ensuring sufficient investor protection 133 . The additional intricacies and drawbacks associated with going beyond three categories are thus considered suboptimal in meeting the objectives of simplification and usability for end-investors.

6.WHAT ARE THE IMPACTS OF THE POLICY OPTIONS AND HOW DO THEY COMPARE?

6.1.Option 0: Repeal of the SFDR 134

vExpected benefits and potential drawbacks for data preparers (FMPs)

This option would effectively remove the implementation costs associated with the SFDR by deleting all entity-level and product-level disclosures. FMPs would be free to choose what ESG-related disclosures, if any, to make to investors and the wider market. There would be no mandatory sustainability-linked product disclosures (those for in-scope companies, including financial entities, would continue under the post-omnibus CSRD) and the field would become unregulated, apart from the use of names as per the ESMA fund name guidelines which only cover a limited number of products 135 (unless these were repealed by ESMA as well – see below under ‘coherence’) and other horizontal rules governing environmental claims 136 .

The main drawback would be that the investments made, and client-bases established, under the SFDR would be cast into doubt. FMPs would no longer have a common regulatory framework for sustainability-linked claims involving financial products. FMPs that have built a competitive position out of ESG-investing and the implementation of the SFDR would face a degree of commercial uncertainty.

vExpected benefits and potential drawbacks for data users (mainly investors and supervisors)

Repealing the SFDR would remove the existing ESG transparency for financial products required under SFDR and would leave markets to design the scope and details of ESG-information involving financial products. Some market-based solutions could potentially constitute viable alternatives to corresponding SFDR provisions, but without certainty that these would happen. Repealing would also go against the current demand for ESG information, as described in section 5.3.2 and elaborated in Annex 10.

The drawback would be that it would create a regulatory void in terms of the availability of structured ESG information regarding financial products. Distributors and investors would no longer have a common regulatory framework for this purpose. If only the ESMA guidelines remained, there would be a significant unlevel playing field across financial products given the limited, and non-binding scope, of such guidelines, to the detriment of investor protection. Product comparability beyond the name would deteriorate and search costs involving more in-depth features of financial products for investors with sustainability preferences would increase. Apart from the name, these investors would need to make sense of other ESG claims made by products themselves. These claims, such as claims in marketing documentations, would be unregulated, raising risks of greenwashing. The Directive on unfair commercial practices, including the recent amendments and Commission guidance 137 , would remain applicable horizontally to all business-to-consumers transactions, but repealing the SFDR would not be coherent with its recognition that financial services warrant specific regulation (Article 3.9; 3.4), given higher levels of information asymmetry between financial market participants and investors 138 . FMPs could choose different ways of showcasing their ESG claims as there would be no common framework requiring FMPs to provide any information, and in a structured manner (i.e. against common criteria) 139 . 

Overall assessment: effectiveness, efficiency and coherence

Effectiveness in addressing the specific problems

This option partly addresses the difficulties faced by FMPs in coping with the lengthy requirements and the costs associated with the lack of publicly available ESG data (problem drivers 1 and 3). It would primarily serve the specific objective of simplifying and reducing administrative burdens. However, the effects would be negative regarding the objectives of ensuring overall coherence with the rest of the sustainable finance framework (see below) and improving end-investors’ ability to understand and compare ESG products. Horizontally applicable consumer protection rules traditionally rely on specific provisions in financial services to ensure investor protection and would be highly unlikely to function effectively to serve this purpose.

Efficiency (costs)

This option would cancel out the costs associated with the SFDR compared to the baseline scenario, estimated to represent an annual total of EUR 246 million in recurring costs (see Annex 3, section 3.10), but investments in commercial opportunities pursued through SFDR compliance would be subject to new uncertainty.

Coherence

A repeal would mean that the field for sustainability-linked disclosures by FMPs would become unregulated, apart from the use of names as per the ESMA fund name guidelines. These have become, after some initial pushback 140 , a broadly accepted and useful source of clarity for FMPs and investors. Indeed, the options further below build on key elements of the guidelines to help achieve some of the objectives above. However, in a scenario in which the SFDR were repealed, there would be some drawbacks in relying on the guidelines alone (in conjunction with horizontal consumer protection rules) to govern, and sustain, the EU single market for sustainability-linked financial products. For one, the guidelines do not apply to all products under the scope of the SFDR, namely pensions and insurance products, for which FMPs signal a continued preference to be covered under common EU rules. Second, they do not constitute strict legal requirements 141 , and inform only the use of ESG terms in fund names, not touching upon other disclosures made to investors under the SFDR.  

National solutions might emerge to address the resulting information gaps and risks, which could fragment the single market (and thereby revive one of the original problem drivers behind the creation of the SFDR in the first place 142 ) and go against overarching objectives under the Savings and Investments Union. Tensions between potential measures in national law could emerge with the ESMA guidelines, which might even force them to be withdrawn, denying the single market of any common EU rulebook in the area.

Regarding coherence with the Omnibus, as mentioned above under the discarded ‘no category’ option, the argument that the Omnibus revokes the need for the SFDR does not stand up. For one, stakeholders are not requesting it 143 . In fact, the Omnibus invokes the need for a coherent and commensurate revision of the SFDR, both to ensure consistency in the ESG data requirements between the various parts of the overall framework, as well as to allow for better serving the needs of end-investors through shorter and more focused ESG information, something which product categories could better convey (see section 6.3). 144  

Finally, without commensurate changes in other linked parts of the sustainable finance framework, a repeal of the SFDR would render some provisions in these other areas meaningless (e.g. links to SFDR-specific terms in sustainability preferences under MiFID/IDD or in the consideration of sustainability risks and factors under UCITS/AIFMD).

Therefore, a repeal of the SFDR would not be a coherent step in light of the results of the evaluation which shows, at once, continued wide support for its objectives and a clear need to overhaul its technical concepts and requirements, which have led to the problems in Section 2. Nor would it be coherent and consistent with the President’s mission letter to Commissioner Albuquerque calling to explore ways to “scale up sustainable finance, in particular transition finance and climate resilience (…), to promote the development and transparent categorisation of financial products and services with sustainability features (… and) to ensure the EU remains a global leader in sustainable finance”. 145

6.2.Measures for alleviating burdens and costs of reporting

6.2.1.Changes to entity-level disclosures

Option 1.1: significant reduction of principal adverse impact disclosures at entity-level

vExpected benefits and potential drawbacks for data preparers (FMPs)

Significantly reducing the entity-level disclosures for FMPs and advisers, as outlined in option 1.1, would lower the costs imposed by the current disclosures. As set out in Article 6(1) of the SFDR Delegated Regulation, all indicators in Table 1 of Annex I, and at least two additional ones, one from table 2 and one from table 3, must be filled out in each PAI statement when an FMP is either required (mandatory) to prepare a PAI statement or if the FMP decides (voluntarily) to prepare a PAI statement. This amounts to 16 indicators. These disclosures were cited by FMPs in the responses to the public consultations as one of the drivers of the costs imposed by the SFDR 146 , especially for FMPs subject to both the CSRD and the SFDR (i.e. subject to duplicative costs). This could also partially reduce the complexity by removing indicators that are the most complicated to report against, as described in section 5.

However, this option only partially reduces the costs associated with entity-level disclosures, estimated to constitute around 25% of the overall recurring costs linked to disclosures and to represent an annual total of EUR 56 million in the baseline scenario 147 (see Annex 3, section 3.10).

vExpected benefits and potential drawbacks for data users (mainly investors and supervisors)

While this option reduces the amount of information available to investors, it would continue to allow for end-investors, civil society and supervisors to receive information to assess the sustainability ambition of an FMPs. Such information would allow data users to discern key sustainability related information on the direction of their overall investment policy (e.g. whether they intend to divest from fossil fuels) to inform their choices. This can allow tracking improvements by FMPs in reducing negative externalities in their investments over time and the alignment of the financial products they offer with their entity-level commitments and claims.

While reducing the number of disclosures would mean that data users lose some ESG information, it also means that the investor-facing disclosures would focus on KPIs that are comparable and understandable. This could boost investors’ ability to understand and compare the ESG ambitions and policies of FMPs and contribute to fighting greenwashing.

However, there is little evidence that these disclosures are being used by end-investors. The majority of FMPs 148 have questioned the practicality of entity-level PAI disclosures for informed investment decision-making and argued that end-investors focus only on disclosures from specific financial products they might buy. That said, a majority of NGOs expressed support for having such disclosures in the SFDR 149 and NCAs’ responses are split 150 . In addition, some research suggests that entity-level disclosures can have a positive impact on how FMPs manage their decarbonisation efforts 151 .

vOverall assessment: effectiveness, efficiency and coherence

Effectiveness in addressing the specific problems

Reducing the entity-level disclosures would partly help address the difficulties faced by data preparers in implementing the complex rules (problem driver 1) and would slightly reduce the cost (although the impact on cost cannot be assessed precisely as it will largely depend on the number of indicators that would be retained).

However, option 1.1 would only partially fulfil the specific objective of simplifying and reducing administrative burdens as the bulk of the costs and implementation challenges reported by FMPs in implementing the entity-level disclosures is expected to stay the same. While the amount of ESG issues to track would be reduced, FMPs would still need to have processes in place to monitor the possible adverse impact of all their assets under management. In addition, the cost of reporting on the possible adverse impacts of all assets is expected to increase as a result of the omnibus proposal, as FMPs are likely to have access to less publicly available data and will need to use estimates. These estimates are either generated internally or bought from third-party data providers, imposing additional costs in both cases 152 . These estimates are typically derived from information obtained directly from investee companies, supplemented by additional research, collaboration with third-party data providers or external experts, or the use of reasonable assumptions.

Option 1.1. is not expected to impact the end-investors’ ability to understand and compare ESG products. However, option 1.1. does allow for higher levels of protection against greenwashing compared to option 1.2. as it allows data used to assess the alignment of the financial products offered by FMPs with their entity-level commitments and claims.

Efficiency (costs)

As noted above, this option only partially reduces the costs associated with entity-level disclosures. These are estimated to constitute around 25% of the overall costs linked to disclosures and to represent an annual total of EUR 56 million in the baseline scenario (see Annex 3, section 3.10). Therefore, this option could be estimated to save less than half of this amount, i.e. less than EUR 28 million.

Coherence

Changes to entity level disclosures do not have a direct impact on the coherence between the SFDR and the rest of the sustainable finance framework (problem driver 2). In fact, the interactions between the SFDR and other sustainability-related financial regulation mainly related to the SFDR product level disclosures which interacts with other disclosures, labels and the distribution rules.

The only relevant interaction is with the CSRD reporting obligations which duplicate the SFDR entity-level disclosures for certain actors (i.e. the roughly 400 FMPs that are subject to both the CSRD and the SFDR today). Without a reduction in the personal scope of the entity level requirement under SFDR to match the future CSRD and a full operational alignment between the (future, post-omnibus) ESRS and reduced SFDR PAIs, Option 1.1 would not address the existing duplications.

Option 1.2: deletion of principal adverse impact disclosures at entity-level

vExpected benefits and potential drawbacks for data preparers (FMPs)

Option 1.2. would considerably reduce the implementation costs associated with the SFDR by deleting all entity-level disclosures (i.e. 16 mandatory indicators). FMPs would only be asked to generate detailed product level disclosures for their ESG products, and not to assess and disclose the potential adverse impacts of all their assets. Removing disclosures linked to the 16 mandatory indicators would reduce the implementation costs associated with the SFDR. Only FMPs subject to the CSRD would need to assess the ESG impact of all their assets under management.

No potential drawbacks for data preparers were identified. FMPs outside the CSRD scope who wish to continue to report entity-level information would still have the option to do so under the future voluntary sustainability-information standards under the revised CSRD.

vExpected benefits and potential drawbacks for data users (mainly investors and supervisors)

Deleting entity-level disclosures on adverse impacts could risk creating a gap in terms of ESG information from economically relevant FMPs that often innovate or pursue long-term investment strategies, and which can inform supervisory oversight of transition risks. This could hinder e.g. tracking (i) improvements in reducing negative externalities of FMP investments over time, and (ii) alignment of financial products with FMPs’ commitments and claims. Based on reporting figures from 2024, roughly 1650 FMPs (around 160 investment firms, 430 banks, 200 pension funds, 330 insurance and 530 asset management) provide entity-level disclosures. 430 are doing it on a mandatory basis 153 . Under option 1.2., the majority of these FMPs would be exempted from such disclosures under option 1.2. However, the largest FMPs (and therefore arguably the most impactful ones) would continue to disclose sustainability information under the CSRD and FMPs outside the CSRD scope could continue to report on a voluntary basis.

vOverall assessment: effectiveness, efficiency and coherence

Effectiveness in addressing the specific problems

Option 1.2. addresses many of the difficulties faced by FMPs in coping with the lengthy requirements and the costs associated with the lack of publicly available ESG data (problem drivers 1 and 3). FMPs would not need to assess the potential adverse impact of all their assets under management anymore, as the SFDR would focus on the ESG assessments and disclosures for products making ESG claims. Option 1.2 would therefore fulfil the specific objective of simplifying and reducing administrative burdens. The largest FMPs would still need to disclose ESG entity level disclosures under the CSRD but would not be subject to duplicative obligations anymore which would lower the burden. The upcoming reduction of the number of indicators to be disclosed under the CSRD would further reduce the burdens for these entities.

In addition, this option is not expected to impact end-investors’ ability to understand and compare ESG products. There is a trade-off whereby end-investors and distributors would be less able to track the alignment of financial products offered by FMPs with their entity-level commitments and claims which might lower investors’ protection against greenwashing regarding FMPs’ ESG claims made at the entity level. However, as stated before, there is little evidence that end-investors or distributors make use of entity-level SFDR information in this way.

Efficiency (costs)

This option would largely cancel out the costs associated with entity-level disclosures compared to the baseline scenario, estimated to constitute around 25% of the overall costs linked to disclosures and to represent an annual total of EUR 56 million (see Annex 3, section 3.10). Based on the analysis in Annex 3, the bulk of the cost reduction is estimated to benefit SMEs (in aggregate, EUR 43 million) while the rest (EUR 13 million) would benefit larger FMPs.

Coherence

Option 1.2. would remove the duplications between the SFDR and the CSRD. This option ensures that future entity-level sustainability-linked reporting requirements are set in a comprehensive, cross-sectoral and coherent way in the ESRS and without scope for sector-specific additional requirements that would risk duplications or excessive complexity. For those FMPs outside the CSRD scope who so wish, options to disclose entity-level information would be based on future provisions under a revised CSRD for a voluntary sustainability-related information standard, envisaged in the shape of a delegated act based on the VSME standard developed by EFRAG 154 .

Comparative assessment of option 0, option 1.1 and option 1.2 impacts

Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect 0 = no effect - = Slightly negative -- = Negative --- = very negative

Stakeholders feedback

The overwhelming majority (89%) of consultation-respondents consider that the objective of the SFDR to strengthen transparency through sustainability-related disclosures in the financial services sector is still fully relevant and over 90% consider that this should be done at EU-level 155 .Overall, the demand for sustainable investment opportunities among investors also remains high 156 . Therefore, stakeholder feedback does not favour a repeal of the SFDR.

Views of responding stakeholders in the public consultations were split on whether the SFDR is the right place to set entity-level disclosure requirements for FMPs and financial advisors, especially across the different stakeholder groups. As stated above, most FMPs and financial advisers responded that they do not consider the SFDR the right place to include entity-level disclosures 157 , while a majority of NGOs expressed support for having such disclosures in the SFDR 158 . NCAs’ responses were split 159 . Responses to the call for evidence 160 were largely in favour of deleting the entity level disclosures, with a small minority of stakeholders expressing preferences for keeping a small set of indicators. 

Respondents’ views on the usefulness of the three sets of SFDR entity-level disclosures were also split. Disclosures concerning sustainability risk policies gathered the highest level of support, with 49% (138 out of 280) of respondents finding them ‘totally’ or ‘mostly’ useful, while 15% (41 out of 280) responded ‘not really’ or ‘not at all’. Opinions are less definitive on disclosures regarding adverse sustainability impacts 161 and remuneration policies 162 . 

Other economic, social, environmental and fundamental rights impact

In general, companies that are required to report against standards have to identify and report on their most significant non-financial risks, dependencies and impacts, and explain how they manage them. This discipline may have an indirect beneficial effect on the environment, society and fundamental rights, to the extent that it affects company decisions and the way companies behave. Options 0 and 1.2 could be expected to have detrimental impacts in this regard. There is, however, mixed evidence about the extent to which reporting requirements on their own will induce companies to mitigate and avoid their negative impacts, especially in comparison to policies and regulations that effectively price negative externalities 163 .

It is therefore not possible to ascertain the concrete relative merits of the options presented in terms of material social, environmental and fundamental rights impacts. Option 0 could arguably be seen as a more drastic move to roll back sustainability-related legislation, which could lead to more detrimental impacts in this regard, whereas option 1.2 would more likely be seen as a targeted move to remove inconsistencies and duplications in the framework, with fewer knock-on effects of this type. In addition, the specific impact of option 1.1. would largely depend on the indicators in the Level 2 regulation that would be removed and the indicators that would be retained. If this option were pursued, this would be best done in a secondary assessment when preparing the amended Level 2 text. Finally, the biggest FMPs (which are assumed to be the most impactful) would still be in scope of the CSRD and would therefore continue to report on social, environmental and fundamental right issuers. The impacts of options 1.1 and 1.2 are therefore expected to be limited 164 while those of option 0 could be broader, as mentioned.

The impact on the international competitiveness of EU companies is also expected to be limited, although, under option 1.1 compared to options 0 and 1.2, some additional costs would continue to be incurred by EU companies subject to the SFDR entity-level disclosures compared to non-EU companies. However, non-EU companies distributing products in the EU that are disclosing under the Articles 8 or 9 would continue to be expected to comply with the SFDR entity-level disclosures under option 1.1.

6.2.2.Changes to product-level disclosures

Option 2.1.: minimal changes to product-level disclosures

This option would broadly maintain the same approach as the current disclosures and would work better with categories that rely on existing concepts.

vExpected benefits and potential drawbacks for data preparers (FMPs)

Option 2.1. would address some of the implementation issues faced by data preparers by clarifying certain concepts underlying the product-level disclosures. For example, the specific disclosures required under the concept of consideration of principal adverse impacts would be clarified, removing some of the compliance challenges faced by the market today.

However, the length and the complexity of the disclosures would remain. Data prepares would continue to face difficulties in implementing the complex rules and in gathering the extensive data needed from underlying investments. They are likely to continue to devote as much resources as they do now. In addition, data preparers would not be given a standardised method to disclose information about transition-related objectives and investments, i.e. there would be no recognition of transitional assets or strategy in the standardised questions of the templates.

Expected benefits and potential drawbacks for data users (mainly investors and supervisors)

Option 2.1. would preserve the variety in the range of datapoints in order to inform investors on many different sustainability-features of products. In addition, the targeted changes to some concepts such as ‘promotion of ESG characteristics’ or ‘consideration of principal adverse impacts’ would increase the comparability of the disclosures linked to these concepts.

However, the disclosures would continue to be very lengthy and to rely on complex and technical concepts which are not easily understandable by all investors, especially by retail investors.

vOverall assessment: effectiveness, efficiency and coherence

Effectiveness in addressing the specific problems

Option 2.1. would allow for minimal disruptions while partly simplifying and reducing the requirements for financial markets (problem driver 1). Targeted changes would simplify and clarify some of the complex ESG concepts such as the ones under the Article 7, 8 and 9 (e.g. consideration of principal adverse impacts and ESG characteristics). However, option 2.1. would not materially reduce the amount of data points that need to be generated by data preparers and would not address the difficulties they encounter when trying to access the necessary data from underlying investments (problem driver 3). It would therefore not fulfil in a satisfactory way the specific objective of simplifying and reducing administrative burdens.

This option would also only partly satisfy the specific objective of improving end-investors’ ability to understand and compare ESG products. The length and complexity of the disclosures has been proven to be a barrier to investors’ (especially retail investors’) understanding (further explained in section 2 and the evaluation annex). While comparability would be increased as a result of the clarification of some concepts, investors would continue to be exposed to unnecessarily extensive sustainability information and, as a result, would not be more likely to understand the key sustainability features of products and would therefore not increase their protection against potentially misleading ESG claims.

Efficiency (costs)

This option is not expected to materially reduce the costs associated with product-level disclosures in the baseline scenario, estimated to constitute around 75% of the overall annual recurring costs linked to disclosures and to represent an annual total of EUR 190 million (see Annex 3, section 3.10) 165 .

Coherence

There are multiple interlinkages between the SFDR product level disclosures and the rest of the sustainable finance framework, as described in Annex 6. However, minimal changes that would be restricted to clarification of certain terms would not have a considerable effect on the coherence with other rules. More specifically, the misalignments between the SFDR definition of ‘sustainable investment’ and similar concepts under the EU Taxonomy and the Benchmark Regulation would not be addressed 166 .

Some targeted changes might be needed under the definition of sustainability preferences under MiFID and IDD to ensure that the modified SFDR disclosures are reflected in the way distributors assess clients’ sustainability preferences.

Option 2.2.: significant reduction of product-level disclosures 

As explained in section 5.3.2, the specific content of the disclosures would be largely defined by the type of category chosen and their underlying criteria. As a result, the analysis of the impacts of this option is linked to such criteria (which are analysed under section 6.3.2, i.e. the analysis of the impact of the categories) and described in section 5.4 and annex 8.

vExpected benefits and potential drawbacks for data preparers (FMPs)

Option 2.2 is expected to considerably cut costs for FMPs and give them more flexibility in the way they can assess and explain the sustainability characteristics or objective of their products. Instead of having to comply with a generic set of questions, relying on complex and data-intensive concepts, FMPs will be able to focus on a shorter number of relevant metrics. The information is however presented in a standardised format through shorter templates. By introducing more extensive cuts to requirements estimated to account for 75% of the costs of the current regime (see also under ‘efficiency’ below), the burden reduction would be expected to be higher than 25%, moving away from the set of about 25 questions to a few indicators and a short template for FMPs to prove their criteria.

The main drawbacks for data preparers would be linked to the transition costs and potential ‘lost’ implementation efforts and costs from the implementation of the current reporting approach.

vExpected benefits and potential drawbacks for data users (mainly investors and supervisors)

The set of disclosures would be shorter, more comparable, and relevant based on a product’s key sustainability objectives or characteristics. As a result, while end-investors and distributors would lose some information compared to today’s situation, as the templates would not cover the wide range of SFDR sustainability concepts for all products anymore, they would have access to much more relevant and consistent information. Shorter and standardised templates containing the disclosures around the criteria are expected to give end-investors and distributors a much better sense of the levels of ambition of each product, and allow for an easier comparability of the information across products.

In addition, option 2.2. would rely on a terminology that would be much more understandable by non-experts. The language used by FMPs would move away from technical jargon such as ‘consideration of principal adverse impacts’, and would instead focus on sectoral exclusions, basic ESG KPIs and a simple explanation of the objective to which the financial product contributes or its main ESG characteristics (e.g. additional exclusions, filters based on best performers etc).

vOverall assessment: effectiveness, efficiency and coherence

Effectiveness in addressing the specific problems

Option 2.2 would tackle challenges linked to the complexity of the current rules and to data availability (problem drivers 1 and 3) and largely simplify and reduce the sustainability related disclosure requirements for financial markets and therefore fulfil the specific objective of simplifying and reducing administrative burdens. First, the disclosures would rely on simpler and clearer concepts (as described in section 6.3) which are less data intensive. For example, instead of analysing the performance of a financial product against a large amount of sustainability concepts (such as the consideration of principal adverse impacts, the alignment with the EU Taxonomy criteria etc), FMPs will be able to focus their sustainability assessment and reporting on metrics that are relevant to their products. The data points to be reported would be significantly reduced.

Option 2.2 would also largely satisfy the specific objective of improving end-investors’ ability to understand and compare ESG products by setting up shorter, simpler and adequate disclosures based on the products’ features. The categorisation of the product would reveal its main key features providing investors and distributors with the essential reassurance of what it aims to achieve, minimising the need for additional disclosures which can overwhelm investors. These disclosures are also expected to be more comparable, enabling investors to easily compare products that fall under the same category. The length of the reporting templates would be considerably shortened and would focus on what is relevant for an end-investor decision making.

Efficiency (costs)

Compared to option 2.1, this option is assessed to help reduce a far greater share of the costs associated with product-level disclosures in the baseline scenario, estimated to constitute around 75% of the overall costs linked to disclosures and to represent an annual total of EUR 190 million. Based on the analysis in Annex 3, in spite of some initial one-off adjustment costs, a conservative estimate of the long-run cost reduction for SMEs in aggregate could amount to EUR 35 million and to EUR 20 million for larger FMPs.

Coherence

As described under option 2.2, and to overcome misalignments and duplications with other parts of the sustainable finance framework (problem driver 2), any changes to the SFDR concepts and product level disclosures would need to be reflected in other parts of the sustainable finance framework. In fact, a perfect alignment between the SFDR disclosures and the definition of sustainability preferences under MiFID and IDD will be necessary. This would entail amendments to the corresponding delegated acts under MiFID and IDD and for distributors to integrate information on categorisation in their processes. This can induce some initial implementation costs, but which will reduce the burdens on distributors overtime.

The future SFDR product level disclosures would need to be aligned with the CSRD disclosures to facilitate that ESG information required from FMPs is available from CSRD companies. The details of the SFDR disclosures would therefore need to be set in a subsequent level 2 act, following the adoption of the simplified ESRS.

Comparative assessment of the impacts

Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect 0 = no effect - = Slightly negative -- = Negative --- = very negative

Stakeholders feedback

The overwhelming support (90%) among of consultation-respondents for better transparency in ESG investing through appropriate sustainability-related disclosures, together with the continued high interest in ESG investment opportunities among investors, is especially relevant to note for product disclosures. The conclusion that stakeholder feedback does not favour a repeal of the SFDR can be re-confirmed.

However, respondents to the public consultations largely agree that changes to the product-level disclosures are warranted. In fact, 84% (249 out of 296) totally or mostly agreed that the disclosures required by the SFDR are not sufficiently useful to investors, and 82% (247 out of 301) that some of its requirements and concepts, such as ‘sustainable investment ’are not sufficiently clear for end-investors.

In terms of which KPIs are necessary for end-investors, a large majority of respondents answered that the disclosures should be restricted to key meaningful indicators that are comparable across different markets and asset classes and easily understandable for retail investors. Respondents mostly mentioned climate, diversity and human rights as topics to be covered by the disclosures. Conversely, some respondents, mainly from the NGO sector, suggested that there should be a comprehensive set of disclosures which could include the mandatory PAIs, alignment with the EU Taxonomy, percentage of investments in undertakings with a science-based transition plan, exclusions and engagement.

55% (152 out of 274) of respondents totally or mostly agreed that products with sustainability claims should be required to substantiate their claims with additional disclosure to ensure credibility and prevent greenwashing. While there was no clear consensus about what these qualitative and quantitative disclosures should be, the most cited ones include: sustainability objectives, sustainable investment strategy and associated binding and measurable KPIs, minimum standards of good governance, percentage of sustainable investments and Taxonomy-alignment, decarbonisation targets, percentage of undertakings having a transition plan, applied exclusions, engagement and voting policies and PAIs. Some respondents argued that such disclosures should be set in a flexible manner to align with diverse product investment strategies and to accommodate innovation and evolving market standards. On the other hand, others are of the view that these disclosures should be set by the regulators and be identical for all financial products with sustainability claims.

Lastly, many respondents agreed on the importance of aligning these disclosures with potential product categories and that any changes to the SFDR disclosures would need to be reflected in the MiFID and IDD sustainability preferences rules.

The responses to the call for evidence 167 confirmed that a large majority of stakeholders across the board welcome considerable simplifications to product level disclosures (for example by limiting the number of pages for the pre-contractual document to 2 to 3 pages), focusing on key information for investors regarding e.g. the potential classification of a product and adherence to associated criteria, its main sustainability-linked objectives and strategy, and KPIs for measuring performance. 

Other economic, social, environmental and fundamental rights impacts

The other impacts of the options are hard to assess as, aside from the repeal option, they will mainly depend on the KPIs selected at level 2. The repeal option would again be a more drastic withdrawal by the EU from setting requirements for sustainability-linked information regarding financial products, which could have more detrimental impacts in terms of real-world ESG outcomes, whereas the other two options suggest keeping the existence of key ESG disclosures for financial products, which will retain the positive indirect impact the SFDR currently has on social, environmental and fundamental rights.

Making these disclosures more efficient, clearer and understandable would result in better information regarding the social, environmental and fundamental rights impacts of financial products. This could in turn attract more private capital into products that have a genuine positive impact, or mitigate better their negative impacts, on these aspects.

6.3.Options for setting up a clear and coherent sustainability-linked product categorisation system

This section follows a two-step approach for the assessment of impacts. First, it assesses the general impact of setting up categories following the approach of option 3.1 and 3.2 (i.e. with new criteria). This step is done to isolate the general impacts of creating new categories and focuses on the similarities shared by option 3.1 and 3.2. The analysis of the impact largely relies on the elements of the criteria described in section 5.4 (see box 3). While details for such criteria will be finalised in Level 2, the key features set in Level 1 allow to conduct a robust analysis of the likely impact of the categories.

As a second step, we conduct a simultaneous assessment of the three options to differentiate their relative benefits and costs and to highlight their contribution to the specific objectives while clearly distinguishing the extent of these effects.

6.3.1.Main benefits and potential drawbacks of setting up new categories under option 3.1 and 3.2

Setting up voluntary categories accompanied by a clear set of new criteria (instead of relying on existing complex SFDR concepts) would ease the implementation burden over time. The different layers of requirements described in the evaluation (Annex 11) would be simplified and streamlined and would be more adaptable to the different objectives or strategies used. In addition, the criteria would provide legal certainty by replacing the central SFDR concepts which have proven to be difficult to apply with clear ESG requirements based on market practice pursuant to the ESMA guidelines (e.g. simple exclusion list instead of a list of indicators to ‘consider’) (problem drivers 1 and 2). The new approach to the criteria would also be less data intensive and allow FMPs to focus on the ESG topics that they find most relevant to their products (problem driver 3). The clarification of the requirements attached to the categories would also favour the alignment of regulatory expectations from NCAs, facilitating their oversight, and would alleviate the need for long disclosure templates thanks to the shorter format of the disclosures. All these benefits would ultimately lead to less burdens and costs in the long run through clearer and simpler criteria. The costs of estimates are minimised through the use of sustainability data points for which estimation is possible (e.g. which are binary or where using sectoral and geographical averages is possible) and where market practices are well established.

The introduction of formal categories relying on criteria would induce an initial implementation cost. However, the suggested criteria would build on the criteria introduced by the ESMA guidelines on fund names 168 . There are currently approximately 4,220 investment funds in scope of these guidelines, meaning that these products have already borne the initial cost of applying such criteria 169 . Annex 8 describes in more detail the specific impacts of the ESMA guidelines on funds using ESG terms in their name, which started applying as of 21 May 2025. For products outside the scope of ESMA guidelines (i.e. insurance and pension products), mitigating measures could be established to soften the implementation costs for those willing to voluntarily use the product categories, via for example a phase-in of the new rules (i.e. FMPs could still apply the current framework for some time). In addition, a grandfathering clause could be applied for existing close-ended funds that could not feasibly amend their portfolio to fit the required criteria. 

The set up of categories would also have the potential to drastically simplify and improve the investors’ journey and enhance their protection against misleading ESG claims, the extent of which would depend on the potential market coverage of the categorisation system chosen, i.e. whether all products making ESG claims would need to comply with EU minimum criteria. As described in the problem definition, investors are currently misled by the use of the disclosure articles as a self-categorisation system by the market (problem driver 4). Setting up categories with clear minimum ESG requirements would improve the comparability of categorised products and would enhance the understanding of products’ main ESG objectives. The mandatory minimum criteria would also ensure minimum ESG performance and ambition and lead to enhanced trust and confidence in products that are categorised and reinforcing the protection of investors against misleading or false ESG claims for categorised products.

Of course, an important consideration to be added is that there is no ‘one size fits all’ on how to granularly define what a positive contribution to a sustainability objective should be. This is mainly due to the wide variety of assets, strategies, sustainability objectives that exist in the current market, and which it is important to continue fostering to support innovation and competitiveness. The suggested criteria ensuring harmonised levels of contributions and common exclusions favour continuity with those market practices and the lates updates to the regulatory framework 170 . As acknowledged at the start of section 5, there is a trade-off between relying on less data to inform categories and investors on the one hand, and possible concerns of greenwashing on the other. However, to balance the objectives of simplification and comparability, support for innovation and investor protection, a choice needs to be made how and on what basis to cluster and capture products in order to convey their main ESG features. The key is to ensure this is done on the basis of data that is both available to a large degree, possible to estimate without excessive effort in case it cannot be derived directly from investees, and is proven to be the most decision-useful for investors, based on their preferences when investing in sustainability-related financial products. Thus, in pursuing the objectives in section 4 in order to ensure coherent, effective and efficient outcomes, while on the one hand the risks of greenwashing for investors cannot be totally excluded, they are minimised through compliance by FMPs with the minimum criteria for ESG product categories and accompanying disclosures including the performance of the product against the objective they have contributed to based on credible, and where possible science-based, indicators. Investors would have a defined dataset, more discrete and less sprawling and overwhelming, to help inform choices and compare products. They could more easily identify where products provide additional datapoints of interest to them, on top of the minimum criteria, facilitating switching between products and providers.

Finally, there are certain limitations to note in how far the categorisation would incentivise prospective investee companies to improve ESG performance. This impact assessment, including the articulation of the problems and specific objectives, primarily looks at the relationship between the end-investor and the financial intermediary, the subject matter of the SFDR. Many other factors besides better transparency, information symmetry and greater comparability in this relationship determine overall market outcomes in terms of efficient capital allocation in the real economy. The initiative therefore needs to be seen in tandem notably with steps towards the Savings and Investments Union, which are beyond the scope of this impact assessment, to fully achieve the general objectives.

6.3.2.Comparative assessment of Option 3.1, Option 3.2 and Option 3.3

Options 3.1, 3.2, 3.3, mostly differ by their market coverage size, their treatment of transition finance, and their underlying criteria. These distinct features entail important differences in the role that the categories could play for retail investors and in the wider framework, especially regarding the marketing and distribution rules (as described in section 5). This leads to important differences in terms of achieving the specific objectives of the review.

Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect 0 = no effect - = Slightly negative -- = Negative --- = very negative

vRelative efficiency (costs)

Expected costs and benefits of option 3.1 and 3.2

Assessing the cost-efficiency of creating categories is more difficult compared to assessing the cost-efficiency of changes to SFDR disclosures. Disclosures are part of the requirements today, for which cost estimates under the baseline scenario are available (Annex 3), whereas categories are not.

First, estimating the initial one-off costs associated with the setup of new categories by engaging with FMPs has yielded limited data. These suggest initial one-off costs for a single FMP starting as of EUR 30 000, with others suggesting one-off costs in the range of EU 60 000 to EUR 500 000. This is mainly because, at this preparatory stage of policy development, FMPs do not have clarity on the type of criteria that would accompany these categories yet.

In addition, estimates also differ on the size of recurring costs associated with categories. Some expect this to represent 5-10% of initial one-off costs. However, the recurring costs with categories would be expected to be lower than the recurring costs of the current SFDR in the longer term due to the following factors:

(1)The rules are expected to be much clearer and to limit gold-plating which would result in less compliance costs linked to uncertainty and to applying different national regimes.

(2)The criteria would build on elements that are already being applied by some financial products under other regulatory pieces (i.e. all funds subject to the ESMA guidelines on funds names would not need to bear the one-off implementation cost again 175 ). As mentioned above, the criteria could be phased in for others (insurance and pensions products). Option 3.1 and 3.2 suggest removing some existing requirement under the SFDR while building on some of the rules under the ESMA guidelines, which should lead to cost reduction for FMPs currently subject to both.

(3)The criteria would be less data intensive and would allow FMPs to focus on a reduced number of datapoints. In addition, these criteria would better reflect, in a far more cost-effective way, the availability of data in the post-omnibus landscape. Categories are thus an effective and efficient way to overcome data gaps compared to today’s baseline scenario in which SFDR disclosures would continue to hinge on access to data which is less likely to be available.

As outlined in section 5.3, the categories would also not involve changes to supervisory costs, nor entail new external verification costs for FMPs, which could otherwise have negative impacts on efficiency. Categories and associated reduced product disclosures also help investors to benefit from data which is more meaningful, decision-relevant and entails lower search-costs – and therefore more efficient from their perspective.

Finally, the costs reported by FMPs should be offset against the savings achieved from reduced disclosures. Given the uncertainty of costs related to categories vs. the availability of cost-estimates for disclosures, it is however not possible to arrive at a reliable estimate of the net figure at this stage.  Annex 3 sets out a rough indication suggesting that there could be some initial one-off costs notably for FMPs which are SMEs which choose to be active in offering ESG products, which could however be offset in the long-term by corresponding cost savings. Given scale-effects, one-off costs for larger FMPs are assessed to be far more limited and which could be quickly offset (after about 2 years) 176 .

Expected costs and benefits of option 3.3

Option 3.3 (minimum changes) is not expected to entail significant changes to costs (negative or positive). Low initial one-off costs are to be expected, and the current high recurring costs should remain very similar, although targeted changes to the existing sustainability concepts could slightly reduce these.

vRelative other economic, social, environmental and fundamental rights impacts

Under option 3.1, categories would imply that a larger number of products would apply EU minimum safeguards, which is expected to have an indirect positive impact on social, environmental and fundamental rights (although the new minimum safeguards would cover fewer sustainability aspects than the current DNSH, but these often relate to factors which are not considered by products anyway 177 ). Under option 3.2, fewer products would apply such safeguards, therefore limiting the positive impact that the SFDR can have in this regard. However, option 3.2 could potentially encourage FMPs to produce more ambitious products, due to the absence of an inclusive lighter 3rd category. This could potentially lead to positive social, environmental and fundamental rights impacts. Under option 3.3, a large number of products would be in scope, but the criteria might be less impactful, therefore reducing the potential positive impact.

Given the dominant share of the EU sustainable investment market (84% of global sustainable fund assets 178 ), simple categories could further boost the EU as an attractive market for investors interested in sustainability.

Summary of relative impacts

Comparative effectiveness, efficiency, coherence and other economic and ESG impact

Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect 0 = no effect - = Slightly negative -- = Negative --- = very negative

vStakeholders’ feedback

The public consultation revealed strong support for a voluntary categorisation system regulated at the EU level: A large majority of respondents believe that EU sustainability product categories are necessary for an efficient distribution system based on investors’ sustainability preferences (69%), to combat greenwashing (64%), and to facilitate professional investors (72%) and retail investors (80%) understanding of products’ sustainability-related strategies and objectives. 72% of respondents believe that disclosures alone are not enough to achieve these objectives. While the distribution of responses is similar across different stakeholder groups, respondents belonging to or representing the three financial services sectors (insurance, asset management and banking sector) have a slightly different view as regards the benefits of product categories for investors. 42% (11 out of 26) of respondents belonging to or representing the insurance sector totally or mostly agree that a categorisation system would improve understanding among professional investors, compared to 73% (104 out of 143) and 76% (13 out of 17) in the asset management and banking sectors, respectively. Similarly, 50% (13 out of 26) of the insurance sector respondents believe a categorisation system would help retail investors, compared to 84% (120 out of 143) and 76% (13 out of 17) in the asset management and banking sectors, respectively.

In addition, the call for evidence 179 confirmed a very large support for creating categories. Most respondents expressed support for creating 3 categories (sustainable, transition, and other ESG), while a small minority preferred 2 categories (sustainable and transition). A small portion of stakeholders also expressed interest for a standalone impact category, while acknowledging that impact products could also fall under the sustainable or transition category and disclose how they conduct impact investing.

The responses to the call for evidence also showed a general agreement regarding the need to align the criteria with the ESMA guidelines (i.e. the PAB and CTB exclusions). Many have also urged to ensure that the criteria will be adapted to all types of asset classes, while underlining that certain assets classes (such as derivatives, real estate and sovereigns) face considerable challenges under the current rules. Stakeholders from the insurance and pension sectors have urged to ensure that the criteria would fit their sectoral specificities.

7.PREFERRED COMBINATION OF POLICY OPTIONS

On the basis of the comparison of options carried out in section 6, the preferred option would combine option 1.2 for entity-level disclosures, 2.2 for product-level disclosures, and 3.1 for the set-up of sustainability-related categories.

7.1.Impacts of preferred options on the specific objectives

This combination of the preferred options is the more efficient and effective overall way to achieve the two specific objectives:

(1)FMPs would be provided with three categories with simple criteria for all ESG products. Compared to the current system, the new approach would create one set of coherent rules regarding ESG claims in names, marketing communication and in the distribution of such products, more geared towards FMPs and investors with an interest in ESG products which would be easier to compare as they would be based on shorter and standardised templates, . The criteria would provide clarity on the regulatory expectations and would also lower the risks of national gold plating. Excessive information requirements which are based on data which is less available and are not found to be decision-useful for investors would be cut. While these new categories may involve an initial cost in the short term (for FMPs and products not already subject to the ESMA guidelines), this would be duly phased in. The trade-off is also justified as the simplification measures are anticipated to reduce recurring costs over the medium to longer term, ultimately leading to greater overall efficiency. Long-term adherence to the fewer rules linked to the categories would be streamlined and much simpler than the current rules FMPs need to comply with. The disclosure requirements that would accompany these disclosures would be much shorter than the current reporting template under the Article 8 and 9. Therefore, as set out in Annex 3, costs linked to product level disclosures are expected to be significantly reduced while those related to entity-level disclosures would disappear. Over time, these would offset the one-off costs of moving to the new rules.

(2)The categories would effectively cluster the ESG financial products into three groupings depending on ESG objectives and levels of ambition. End-investors would be able to easily and quickly understand whether a financial product is focused on contributing to a sustainability objective/made largely of sustainable assets, if a product is focused on helping companies to transition toward more sustainable practices, or if a product is applying broader or lighter ESG strategies. The underlying criteria of the categories would ensure harmonised minimum ESG performance, notably against risks deemed unacceptable by the majority of sustainability-minded investors 180 , thereby increasing investors’ protection against greenwashing risks. Also, accompanying product disclosures would be made easier and simpler for them, giving them the essential information which experience demonstrates is of greatest value 181 , with an opportunity for investors to get more detailed information on the ESG features if they want. This would facilitate the comparison of ESG products falling under the same category.

7.2.Impacts of preferred options on the general objectives

The preferred options would help contribute to the general objectives. Namely, they would help boost the integrity of the EU single market for sustainable finance by fighting greenwashing in an effective and efficient way, by replacing lengthy and complex disclosures with targeted minimum safeguards and ambition criteria, which would apply to all products making ESG claims or be distributed to retail investors with preferences for sustainable products. This would also help encourage the efficient allocation of capital for Europe’s sustainable prosperity by boosting trust in ESG financial products and contributing to re-directing private capital that either contribute positively to EU sustainable goals or avoid harm to these objectives as part of deeper, more integrated and more competitive EU financial markets. No other EU legislation sets ESG disclosures for financial products which can help serve this purpose, and market-based solutions which would deliver the same are highly unlikely to emerge. Of course, as the options address the specific objectives identified for this initiative, they would need to work in tandem with other factors, involving the efficient functioning of markets and determining capital allocation, which are beyond the scope of this impact assessment, to fully achieve the general objectives.

The combination of the preferred options is expected to directly or indirectly contribute to positive environmental, social and human rights impacts through its three ESG categories, underpinning criteria and accompanying simpler disclosures. All ESG products would need to comply with EU minimum safeguards if they wish to make ESG claims or be distributed as such. These safeguards would include, depending on the nature of the claims, elements linked to the respect of human rights, adherence to social safeguards and norms, and mitigation of key environmental impacts. Certain ESG products would also need to demonstrate their positive contribution to environmental, social or fundamental right objectives, in order to fall under the more ambitious categories (sustainable and transition). These products would also need to comply with minimum disclosure requirements, which would include reporting on some social aspects.

This initiative is also expected to directly or indirectly contribute to the achievement of UN Sustainable Development Goals (SDGs) notably those related to the climate, environment and social progress by ensuring that ESG financial products can more efficiently both contribute to and not cause harm to these goals. Finally, in this regard the combination of the preferred options is also assessed to be the best way to ensure that the revised SFDR is consistent with the climate neutrality objective of the climate law 182 .

7.3.REFIT (simplification and improved efficiency)

As per the specific objective 1 (and the description of the impact of the preferred option on this objective in section 6), the combination of the preferred options has the potential to drastically simplify and improve the efficiency of the legislation.

7.4.Application of the ‘one in, one out’ approach

The quantifiable costs of this initiative are categorised as administrative costs from a better regulation perspective as they link to costs for disclosures to the public.

For the preferred option 1.2, we estimate an annual saving of EUR 56 million compared to the baseline. For the preferred option 2.2. we conservatively estimate annual recurring savings of at least EUR 55 million and for 3.1 we were unable to collect sufficient quantitative evidence to estimate the costs with a sufficient degree of statistical confidence.

Overall, Annex 3 suggests a net reduction in administrative costs from the initiative 183 .

8.HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?

To monitor progress towards meeting the specific and general objectives, the Commission services would continue to work together with established processes underway notably with the European Supervisory Authorities (ESAs) and the Platform for Sustainable Finance (PSF) to analyse:

(1)The costs incurred by the industry - The ESAs and the NCAs could be tasked to survey and assess the implementation costs linked to the new categorisation system at the latest 3 years after its implementation. This assessment could also monitor the cost reductions from the reduced disclosures and assessing how the market is adapting to the new rules.

(2)Possible occurrences of greenwashing in EU markets. The ESAs – together with the national competent authorities (NCAs) are already monitoring the occurrences of greenwashing and supervise sustainability-related claims. Their 2023 and 2024 reports 184 assess which areas of the sustainable investment value chain (SIVC) are more exposed to the risk of greenwashing. The Commission could work with the ESAs to conduct these assessments regularly (e.g. every two years), including to help assess the effectiveness of the future SFDR as a tool against greenwashing and amid the changes introduced by the omnibus proposals.

(3)Capital flows to sustainable investment – the Platform for Sustainable Finance has developed a novel framework for monitoring capital flows to sustainable investment, i.e. the financing of a clean and competitive transition 185 . The Commission could work with the PSF to conduct a targeted analysis a few years after the implementation of the regime to assess the degree to which the categorisation system, together with the simplified disclosures, has helped boost financing toward sustainable economic activities and projects and helped lower the cost of capital linked to these.

(4)The understanding of EU retail investors – Finally, the Commission could work with the ESAs and other associations to conduct a consumer survey a few years after the implementation of the regime. The survey could test whether the categories and their accompanying streamlined disclosures have managed to improve consumers’ ability to understand and compare ESG products and deliver credible ESG information to investors.

Annex 1: Procedural information

1.Lead DG, Decide Planning/CWP references

This Impact Assessment Report was prepared by Directorate C "Financial Markets" of the Directorate General "Directorate-General for Financial Stability, Financial Services and Capital Markets Union" (DG FISMA). The Decide Planning reference of the "Revision of the Sustainable Finance Disclosure Regulation (SFDR)" is PLAN/2024/2126. This initiative is part of the Commission’s Work Programme Simplification 2025.

2.Organisation and timing

Several services of the Commission with an interest in the initiative have been involved in the development of this analysis. Three Inter-Service Steering Group (ISSG) meetings, consisting of representatives from various Directorates-General of the Commission, were held in 2024 and 2025.

The first meeting took place on 2 October 2024 attended by representatives from DEFIS, ENV, CLIMA, EMPL, GROW, JUST, JRC, SJ, INTPA, and the Secretariat General (SG).

The second meeting was held on 24 April 2025. Representatives from DEFIS, MOVE, SJ, INTPA, ENV, CLIMA, EMPL, GROW, JUST, ENER, JRC and the Secretariat General (SG) were present.

The third meeting was held on 21 May 2025 and was attended by JRC, EMPL, MOVE, DEFIS, GROW, CLIMA, JUST, ENER, ENV and the SG. This was the last meeting of the ISSG before the submission to the Regulatory Scrutiny Board on 4 June 2025. The meetings were chaired by FISMA.

DG FISMA has considered the comments made by DGs in the final version of the IA.

3.Consultation of the RSB

The Impact Assessment report was examined by the Regulatory Scrutiny Board on 2 July 2025. The Board gave a negative opinion with the following comments. The changes in response to the comments are summarised under each respective point below (referring to version 1). The Board gave a positive opinion with reservations on the revised version on 8 October 2025, changes to which are also summarised below (referring to version 2).

Other changes in response to comments by the RSB (version 1)

-The analysis of the problems is substantiated with further background of the root causes and other factors that have led to their emergence (in the evaluation, annex 11 to do with the timing of implementation of the existing SFDR, unsolved data availability issues, insufficient sensitivity to genuine investor-needs etc.) and which inform the lessons learned for the review.

-Further detail throughout the report that the requirements underpinning the proposed categories, including the ‘transition’ category largely favoured in feedback by FMPs and investors, do not constitute major new departures from the status quo but rather codify existing requirements and practice under the ESMA guidelines for fund names, and update and retrofit the requirements of the SFDR to this purpose.

-Analysis to underpin that the proposed new disclosures and categories would constitute a more proportionate regime than the status quo, more consciously geared toward FMPs and investors with an explicit interest in ESG investing (section 5).

-Further analysis showing that the discarded options (soft law/no categories/one category/more than three categories) are suboptimal in meeting the specific and general objectives of the review and at odds with stakeholder feedback (section 5.5).

-A discussion on how investment in sovereign bonds could be treated in assessing their potential positive ESG contribution (annex 7), noting that stakeholder feedback on the issue is inconclusive in the absence of comprehensive metrics for measuring public sector ESG performance, and suggesting a preference for their inclusion on an optional or partial basis, subject to additional disclosures.

 Other changes in response to comments by the RSB (version 2)

-Besides information on the trade-offs with estimates added in section 5.4 and 6.3, further assessment is added in sections 5.4 and Annex 8, section 3 on why it is not considered apt to regulate ESG data providers, given the main results of the evaluation, coherence with the overall simplification agenda and for reasons of proportionality.

-Further clarifications are added to the introductory part of section 5, section 5.4 and section 6.3 on the voluntary nature of the revised framework, that this however entails certain restrictions for non-categorised products on how they can be marketed to investors, and that the preferred options do not go beyond what is necessary to achieve the objectives.

-The option to repeal the SFDR is complemented with details on links to horizontal consumer protection rules in sections 5.2, section 6.1 and Annex 6, section 3, and why reliance on these would likely be suboptimal, as well as further recalling why mere reliance on ESMA fund name guidelines would also be ineffective.

-Section 5.4 adds some analysis that the framework will have to evolve over time, should not be overly prescriptive to begin with to prevent this from happening, and that notably research regarding consumer preferences will continue to be important to reflect in level 2 and in future updates of the framework.

4.Evidence, sources and quality

The impact assessment draws on a combination of desk research, a targeted and open public consultation, two Briefings from the Platform for Sustainable Finance (PSF), a joint Opinion from the European Supervisory Authorities (ESAs), external studies, meetings with stakeholders and other outreach. The material used has been gathered since December 2022, when Commissioner McGuinness announced a comprehensive assessment of the SFDR framework. This material includes but is not limited to the following:

1.Targeted 186 and open public 187 consultation: The targeted and open public consultations, held between 14 September 2023 and 22 December 2023, were an important part of the assessment announced by Commissioner McGuinness to evaluate potential shortcomings – focusing on legal certainty, the useability of the regulation and its ability to play its part in tackling greenwashing. The open public consultation was addressed to the general public. The targeted consultation gathered input from public bodies and stakeholders who were more familiar with the SFDR and the EU’s sustainable finance framework. Views were welcome from financial market participants, investors, NGOs, relevant public authorities, national regulators, and others that were subject directly or indirectly to the provisions of the SFDR and/or had more in-depth knowledge and/or (working) experience in the field of sustainable finance disclosures. The consultation provided the Commission with valuable input to inform the review of the SFDR.

2.Four technical workshops and roundtables, enabling stakeholders to submit further input. The workshops and roundtables complemented the open and targeted consultation, enriching the information and the observations received in the consultation.

3.Two Briefings 188   189 from the expert group the Platform for Sustainable Finance (PSF). The Platform for Sustainable Finance (PSF) responded to the Commission’s targeted consultation with a briefing note in December 2023. Further on, the PSF published in December 2024 a briefing note for the Commission outlining how a categorisation system for sustainable finance products could be set up.

4.The joint Opinion from the European Supervisory Authorities (ESAs) on how to set up categories for financial products 190 . The Commission duly considered this joint Opinion by the European Supervisory Authorities (the ESA’s), delivered in June 2024 on their own initiative.

5.External Studies: the Commission has considered studies from both institutional and academic sources, quoted throughout in this assessment. Inter alia, the Commission considered the views contained in the study requested by the ECON Committee of the European Parliament on “the current implementation of the SFDR” 191 . The Commission also pondered the input provided in “Mind the ESG capital allocation gap”, by economists Jan Fichtner, Robin Jaspert and Johannes Petry.

6.Engagement with Member States in the context of the Member State Expert Group (December 2024, June 2025), receiving preliminary inputs.

7.Continuous engagement with experts on key challenges and on how to set up categories. With a view to address specific issues, the European Commission continuously engaged with experts from the financial industry, NGOs/civil society and academics, as needed.

8.Feedback gathered during the Call for Evidence which ran from 2 May to 30 May 2025.

The material used to inform this impact assessment comes from the market participants as well as other reputable and well-recognised sources. Findings were cross-checked across the different information sources to avoid biases caused by outliers or vested interests.

Annex 2: Stakeholder consultation (Synopsis report)

1.Overview of consultation activities

In December 2022, Commissioner Mairead McGuinness announced a comprehensive assessment of the SFDR framework. Since then, the European Commission has conducted extensive consultation activities, addressing all aspects of the proposed legislative review.

These activities encompassed:

1.Two public consultations that ran from September to December 2023 (targeted 192  and open 193 ). A summary report 194 was published in May 2024.

2.Four technical workshops and roundtables, enabling stakeholders to submit further input.

3.Two Briefings 195   196 from the expert group the Platform for Sustainable Finance (PSF).

4.The joint Opinion from the European Supervisory Authorities (ESAs) on how to set up categories for financial products 197 .

5.The Study requested by the ECON Committee of the European Parliament on “the current implementation of the SFDR” 198 .

6.Engagement with Member States in the context of the Member State Expert Group (December 2024, June 2025)

7.Continuous engagement with experts on key challenges and on how to set up categories.

8.Feedback gathered during the Call for Evidence which ran from 2 May to 30 May 2025.

2.Stakeholder consultations

2.1.Targeted and open public consultations

Two public consultations, open and targeted, ran from September to December 2023. The open consultation, aimed at the general public, asked about the current requirements of the SFDR and the interaction with other sustainable finance legislation. As the Commission was also interested in exploring possible options to improve the framework and address any potential shortcomings, it also presented a targeted consultation, aimed at experts such as financial market participants, investors, NGOs, relevant public authorities and NCAs inter alia, adding to the questions of the public consultation other queries about potential changes to the disclosure requirements of the SFDR and the potential establishment of a categorisation system for financial products.

324 organisations and individuals participated in the targeted consultation. Financial market participants (FMPs) and financial advisers made up the largest group of respondents (63%, 204 out of 324), primarily consisting of asset management firms (75%), insurance companies (14%), and banks (10%). The second largest group of respondents were NGOs, which constituted 11% (36 out of 324) of the respondents. FMPs and financial advisers who responded to the consultation mostly conduct business for both professional and retail investors (44%) or towards professional investors only (41%), with 14% focusing solely on retail investors. Respondents were predominantly from EU countries, with France, Germany, Belgium, Spain, and Luxembourg being the most represented (23%, 10%, 7%, 6%, and 6%, respectively, totalling 52%). Approximately 19% of respondents were from non-EU countries, predominantly the UK (11%) and the US (5%).

51 respondents provided answers to the open public consultation only. This group consists mainly of FMPs and financial advisers (37.3%, 19 out of 51) and NGOs (15.7%). The greatest number of respondents were from Germany (14%, 7 out of 51), followed by France, Belgium, Romania (12% each), and the UK (10%). Their responses were consistent with the trends observed in the targeted consultation.

2.2.Technical workshops and roundtables

The European Commission also held a series of technical workshops and roundtables when it issued the consultations on the implementation of the SFDR, allowing stakeholders to provide further comments accompanying the replies to the consultations. The workshops took place in October and December 2023, and January 2024.

2.3.Two opinions from the expert group the Platform for Sustainable Finance (PSF).

The Platform for Sustainable Finance (PSF) prepared a briefing note in December 2023 to address the main questions raised by the European Commission in the targeted consultation.

Following the European Commission’s public consultation, in December 2024 the PSF published a briefing note for the Commission outlining how a categorisation system for sustainable finance products could be set up and calibrated. The briefing note is accompanied by an annex with guidance on setting thresholds and supporting data. The annex shows primary findings on the current state of the ESG markets and the potential impact that setting certain thresholds could have on current products falling under the scope of Article 8 and Article 9 of the SFDR. It also provides guidance on steps to determine possible thresholds for categories.

2.4.The Opinion from the European Supervisory Authorities (ESAs) on how to set up categories for financial products.

The European Supervisory Authorities (the ESA’s), on their own initiative, delivered in June 2024 a joint Opinion on the assessment of the SFDR.

2.5.The Study requested by the ECON Committee of the European Parliament on “the current implementation of the SFDR”.

This document was provided in July 2024 by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. The purpose of the study is to inform the policy debate on sustainability disclosures under the SFDR and provide a legal assessment on possible changes to be brought to relevant legislation in order to improve the framework. The opinions expressed in the study are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament.

2.6.Engagement with Member States in the context of the Member State Expert Group (December 2024, June 2025)

The European Commission engaged with Member States in the context of the Member State Expert Group in December 2024, receiving preliminary comments.

2.7.Continuous engagement with experts on key challenges and on how to set up categories.

The European Commission engaged continuously with experts such as financial market participants, investors, NGOs, academics and other interested stakeholders, to tackle specific issues.

2.8.Feedback gathered during the Call for Evidence which ran from 2 May to 30 May 2025.

195 stakeholders responded to the call for evidence. Businesses associations and companies/businesses made up the largest group of respondents (68,4%). The second largest group of respondents were NGOs, which constituted 9.8% of the responses, followed by national authorities (5.2%). Respondents were predominantly from EU countries, with France, Germany, Belgium, Italy and Netherlands being the most represented (19,7%, 16,1%, 15%, 6,7%, and 5.2%). 14% of respondents were from the UK.

3.Results of the stakeholder consultations:

3.1.Current requirements of the SFDR and interaction with other sustainable finance legislation.

The consultation showed widespread support for the broad objectives of the SFDR. 89% (272 out of 304 respondents) considered that the objective to strengthen transparency through sustainability-related disclosures in the financial services sector was still relevant. In addition, 94% (276 out of 294 respondents) totally or mostly agreed that opting for a disclosure framework at the EU level was more effective than national measures at Member State level.

However, a wide majority of respondents also highlighted key limitations of the framework such as lack of legal clarity regarding key concepts, limited relevance of certain disclosure requirements and issues linked to data availability. According to many respondents, these limitations had hindered the effectiveness and usability of the framework.

Most notably, 84% (249 out of 296) totally or mostly agreed that the disclosures required by the SFDR are not sufficiently useful to investors, and 82% (247 out of 301) that some of its requirements and concepts are not sufficiently clear. 88% (263 out of 299) totally or mostly agreed that data gaps are making it challenging for FMPs and financial advisers to cope with the SFDR legal requirements. Most respondents agreed that these limitations are currently creating legal uncertainty (79%, 233 out of 296) and posing reputational risks for FMPs and financial advisers (80%, 237 out of 297) as well as risks of greenwashing and mis-selling (81%, 237 out of 294). In addition, a great majority (over 66%) of FMPs and financial advisers (over 66%) considered the current interactions between principal adverse impact (PAI) product and entity level disclosures unclear. In particular, 80% of FMPs face methodological challenges with the requirement to ‘take account of ’the principal adverse impact (PAI) indicators established in the RTS at entity level for the ‘do no significant harm ’(DNSH) test at product level. In addition, 77% found it unclear how FMPs should approach materiality as regards these PAI indicators in the context of product disclosures for DNSH.

When asked about issues surrounding data availability, 98% (176 out of 180) of FMPs who responded to these questions said they faced difficulties in obtaining good-quality data, and 53% (90 out of 171) reported engaging to a very large or large extent with investee companies to encourage reporting of the missing data. When asked about the cost of disclosures, 58% (167 out of 287) of total respondents answered that they did not consider it to be proportionate to the benefits generated. This figure increases to 71% (133 out of 186) among FMPs and 6 financial advisers. FMPs and financial advisers indicated that the main components of the costs of disclosures are the costs of personnel and of external advisory services.

Finally, 83% of respondents (245 out of 296) totally or mostly agreed that the SFDR was not being used solely as a disclosure framework as intended but also as a labelling and marketing tool (in particular articles 8 and 9).

As a result, respondents expressed divided opinions regarding the extent to which the regulation had achieved its objectives during its first years of implementation. For example, A majority (62%, 181 out of 292) said the SFDR had not effectively strengthened protection for end investors or made it easier for them to compare financial products with sustainability claims. A slight majority (52%, 153 out of 294) did not agree that it had successfully directed capital towards investments deemed sustainable, including transitional investments.

The PSF, for its part, made in its Briefing suggestions to improve the effectiveness and the understanding of ESG and sustainable investment products: to precisely align the product's name, its sustainability marketing claims, declared sustainability contributions, and the actual investment strategy; that the reporting on sustainability performance should cover the entire product, rather than just a portion of it; and when referencing sustainable economic activities, the definitions of environmentally sustainable investments to be exclusively derived from the Taxonomy.

As regards the interaction with other sustainable finance legislation, the consultation showed consensus on the need to ensure consistency across the wider Sustainable Finance framework: many respondents identified problems with the interactions between the SFDR and the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), the sustainability rules under MiFID II and IDD and the EU Climate Benchmarks. These respondents stated that these misalignments led to implementation challenges and operational costs and called for further improvement in the overall coherence of the wider framework.

The ESAs, in their joint opinion, also concurred that the framework could be improved and that the disclosures to investors in the SFDR may be complex by nature and difficult to understand, in particular for retail investors, as shown by two consumer testing exercises 199 . In addition, the ESAs also noted that, in practice, disclosures had been used by financial market participants to classify their financial products, as ‘Article 8’ or ‘Article 9’ products had been used since the outset in marketing material as ‘quality labels’ for sustainability, consequently posing greenwashing and mis-selling risks.

The study requested by the ECON Committee concurs with the view that investors, especially retail ones, have little use for most of the information generated under the SFDR. The disclosures are complex and based on concepts that are unfamiliar and unintuitive for them. Moreover, investors would be unable to differentiate the types of funds within Article 8 or Article 9 and may even struggle to differentiate Article 8 and Article 9 products. The study also recognizes that, while the SFDR was conceived as a disclosure regime, in practice it is used instead as a labelling scheme for products, yet with no binding threshold to substantiate the claims, leading to uncertainty and making it hard for investors to assess the veracity of green claims. That, in turn, increases the risk of “greenwashing” and mis-selling, but also of “green bleaching”, i.e., when FMPs choose not to claim environmental, social, and governance (ESG) features for their products to avoid extra costs and legal risks.

The Study also noted inconsistencies between the SFDR and other Sustainable Finance legislation, signalling for instance inconsistencies with the Taxonomy Regulation, the Benchmarks Regulation exclusions and their relationship with the SFDR’s PAIs, or some problems with corporate reporting under the Corporate Sustainability Reporting Directive (CSRD): corporates and FMPs may differ about what “material” impacts must be reported, and corporates who struggle to comply with all the CSRD data points may have little incentive to produce information in a form and level of detail enough to let FMPs to comply with their own SFDR-based reporting.

Feedback from the call for evidence very much reflected the previous feedback on the main limitations of the SFDR. The key limitations mentioned included the lack of clarity of the main concepts (i.e. sustainable investment and principal adverse impact); the excessive complexity of the disclosure requirements, the gold-plating practices and the poor comparability across products. As a result, the large majority of responses to the call for evidence suggests that the review should aim at simplifying the framework and definitions, enhance legal certainty and supervisory harmonisation, improve data quality and focus on end-investor understanding.

3.2.Changes to the disclosure requirements

Entity level disclosures:

In the consultation, views on whether the SFDR is the right place to set entity-level disclosure requirements for FMPs and financial advisers were split, especially across the different stakeholders ’groups. Most FMPs and financial advisers responded that they do not consider the SFDR the right place to include entity-level disclosures 200 , while a majority of NGOs expressed support for having such disclosures in the SFDR 201 . NCAs’ responses were split 202 .

There was no consensus either regarding the views on the usefulness of the three sets of SFDR entity-level disclosures. Disclosures concerning sustainability risk policies gathered the highest level of support, with 49% (138 out of 280) of respondents finding them ‘totally’ or ‘mostly’ useful, while 15% (41 out of 280) responded ‘not really’ or ‘not at all’. Opinions were less definitive on disclosures regarding adverse sustainability impacts (31% in support, 31% against) and remuneration policies (39% in support, 26% against).

Those in favour of the existing set of entity-level disclosures stated that they can provide valuable information to investors and civil society, allowing them to assess the sustainability ambition of an FMP and serving as a tool against greenwashing. Those against argued that they are not appropriate or useful to end-investors investing in financial products and reported that investors rarely seek aggregate sustainability-related information at the level of the FMP.

A large majority of respondents called for these disclosure requirements to be simplified and streamlined across the sustainable finance framework. Many expressed concerns about a potential overlap between the transparency requirements on principal adverse impacts under the SFDR and the reporting obligations under the CSRD.

The PSF in its Briefing recommended assessing to what extent the disclosure of Principal Adverse Impacts (PAIs), at an entity level, could be integrated into CSRD/ESRS disclosures for Financial Market Participants (FMPs) that adhere to both regulations. The Platform believed that conducting a review of the effectiveness of various requirements, simplifying them and prioritising GHG emission reduction targets, progress reporting, taxonomy and transition plans would be beneficial.

The large majority of the responses to the call for evidence supported the deletion of the entity-level disclosures. Most respondents argued that end-investors are more interested in product-related information and that entity level disclosures should only be mandated under the CSRD, as per the new scope proposed by the omnibus. However, a small minority was in favour of retaining the entity-level disclosures while streamlining them in view of the reduction of data points under the CSRD.

Product level disclosures:

The consultation sought stakeholder views on potential changes to the product level disclosures, specifically on whether the framework should impose uniform requirements for all or for some financial products (e.g. products whose asset under management exceed a certain threshold to be defined, or products intended solely for retail investors) regardless of their sustainability-related claims, and whether additional disclosure requirements should be required from financial products that make sustainability-related claims. 56% of respondents (161 out of 288) agreed ‘to a very large’ or ‘large extent’ that the EU should impose uniform disclosure requirements for all financial products offered in the EU, regardless of their sustainability claims. 31% (88 out of 288) of respondents expressed the opposite view. Supporters of this measure, which were present throughout all stakeholders’ groups (for example, 50% of FMPs and financial advisers support such disclosures), argued that it would enable a level playing field, avoiding that sustainable products are disadvantaged by more reporting burdens and costs. Some also argued that it would enhance transparency and comparability, allowing investors to make better informed choices. Those against argued that it would impose unnecessary costs on products without sustainability claims and could confuse investors with information that may not be aligned with a product’s investment strategy, raising the risk of greenwashing. When asked about what these disclosures should be, a large majority of respondents answered that they should be restricted to key meaningful indicators that are comparable across different markets and asset classes and easily understandable for retail investors. Respondents mostly mentioned climate, diversity and human rights as topics to be covered by the disclosures. Many respondents also argued that metrics on transition should be added. Conversely, some respondents, mainly from the NGO sector, suggested that there should be a comprehensive set of disclosures which could include the mandatory PAIs, alignment with the EU Taxonomy, percentage of investments in undertakings with a science-based transition plan, exclusions and engagement.

In the consultation it was shown that there was less support for imposing uniform disclosure requirements for some financial products, regardless of their sustainability related claims (e.g. products whose assets under management exceed a certain threshold to be defined, or products intended solely for retail investors), with 62% (172 out of 277) of respondents not agreeing at all, or only agreeing to a limited extent. The distribution of responses is similar across all stakeholder groups. Most respondents expressed concerns that it would make sustainability performance comparison impossible and would make the disclosure framework more complex and confusing. Many have also flagged that it would be challenging to define a subset of financial products that would need to fall within the scope of these disclosures.

Additionally, 55% (152 out of 274) of respondents agreed that products making sustainability claims should provide additional disclosures to support their claims to ensure credibility and prevent greenwashing. While there was no clear consensus about what these qualitative and quantitative disclosures should be, the most cited ones include: sustainability objectives, sustainable investment strategy and associated binding and measurable KPIs, minimum standards of good governance, percentage of sustainable investments and Taxonomy-alignment, decarbonisation targets, percentage of undertakings having a transition plan, applied exclusions, engagement and voting policies and PAIs. Some respondents argued that such disclosures should be set in a flexible manner to align with diverse product investment strategies and to accommodate innovation and evolving market standards. On the other hand, others were of the view that these disclosures should be set by the regulators and be identical for all financial products with sustainability claims.

Lastly, many respondents stressed the importance of aligning these disclosures with potential future product categories and minimum criteria under the revised SFDR framework and argued that any changes to the SFDR disclosures would need to be reflected in the MiFID and IDD sustainability preferences rules.

On the other hand, the PSF in its Briefing in December 2023 underlined the importance of PAI disclosure on product level, in particular for products that consider PAIs under Article 7 of the SFDR.

The Platform also proposed a streamlined approach to disclosures, recommending a set of pre-contractual disclosures and a single set of periodic reporting disclosures.

Disclosures should focus on key information, accommodating multi-option products by utilising website disclosure for additional details, such as individual PAI indicators.

The Platform envisioned the integration of the Taxonomy into the periodic reporting of any financial product in the future.

Over the long term, the Platform advocated mandatory minimum ESG reporting requirements, including GHG emissions and the Taxonomy, across all financial products.

Lastly, the Platform underscored the importance of distinguishing between pre-contractual commitments and periodic reporting, claiming that the former entails product restrictions while the latter provides information on the current investments of the product.

As regards the ESAs, in their joint Opinion published in June 2024 they recommended the Commission to ensure that sustainability disclosures catered to different investor needs, and improvements in sustainability disclosures took into account different distribution channels, including digital ones, and ensured consistency of information provided. The Commission should prioritise only essential information for retail investors while professional investors may benefit from more detailed information. The ESAs encouraged the Commission to carefully reflect on whether to include other products in the SFDR scope to ensure harmonised disclosures for both products currently in the scope of SFDR and any other products that could be brought into the scope. Furthermore, information on key adverse impact indicators could be considered for all financial products, based on a cost-benefit analysis justifying the introduction of such requirement; and the ESAs also suggested that the Commission could evaluate the introduction of a framework to assess the sustainability features of government bonds, taking into account the specificities of that asset class.

For its part, the Study requested by the ECON Committee considers that SFDR disclosures should work seamlessly with other disclosure rules. In general, the information pipeline (including corporate reporting under the CSRD, indexes under the Benchmarks Regulation, and reporting under the SFDR) needs to be streamlined. A more widespread reporting of PAIs, covering more products, is needed, but calibrated between sustainable or impact products, transition products, and general products with no sustainability features. The Study claims that the streamlining of rules and the expansion of their scope, would derive considerable benefit from more emphasis, in parallel, on FMPs’ methodologies, technology and tools to process the information. Authorities that play a constructive role in developing such methodologies and tools could be more prescriptive in their expectations, while reducing (some) FMPs’ dependence on “infomediaries”, regulated (index and ESG Ratings providers) or not (e.g., other data providers).

The call for evidence signalled that a large majority of stakeholders across the board welcome considerable simplifications to product level disclosures (for example by limiting the number of pages for the pre-contractual document to 2 to 3 pages), focusing on key information for investors regarding e.g. the potential classification of a product and adherence to associated criteria (see below), its main sustainability-linked objectives and strategy, and KPIs for measuring performance. In addition, most respondents stressed the need to add a reference to the category in the PRIIPs KIID. Most respondents also indicated that disclosures of sustainability risks remain useful, including for products currently falling under Article 6 (i.e. or non-categorised products).

3.3.Categorisation for financial products

In the consultation, strong support for a voluntary categorisation system regulated at the EU level was expressed: a large majority of respondents (72%, 205 out of 284) totally or mostly disagreed with the idea that simply disclosing sustainability information was enough, indicating the need to set up an EU categorisation system for financial products. While the distribution of responses was similar across different stakeholder groups, respondents belonging to or representing the three financial services sectors (insurance, asset management and banking sector) had a slightly different view as regards the benefits of product categories for investors: 42% (11 out of 26) of respondents belonging to or representing the insurance sector totally or mostly agree that a categorisation system would improve understanding among professional investors, compared to 73% (104 out of 143) and 76% (13 out of 17) in the asset management and banking sectors, respectively. Similarly, 50% (13 out of 26) of the insurance sector respondents believed a categorisation system would help retail investors, compared to 84% (120 out of 143) and 76% (13 out of 17) in the asset management and banking sectors, respectively.

61% (163 out of 268) of respondents agreed that the SFDR is the appropriate legal instrument to deal with the accuracy and fairness of marketing communications and the use of sustainability related names for financial products, 19% (51 out of 268) disagreed and the remainder were unsure. In addition, 69% (192 out of 279) of respondents totally or mostly agreed that the introduction of product categories should be accompanied by specific rules on how market participants must label and communicate on their products. Several stakeholders raised timing concerns regarding the ESMA guidelines for fund names and the regulatory coherence with a potential new product categorisation system.

The consultation asked about two proposed approaches to a potential EU categorisation system: whether such categories should be based on new criteria (not related to existing concepts under the SFDR) (approach 1), or if Articles 8 and 9 should be converted into formal product categories by clarifying and adding criteria to support the already existing concepts (approach 2). Respondents showed no clear preference: results indicated a slight preference for the first approach, with 50% (145 out of 293) of respondents totally or mostly agreeing and 23% (66 out of 293) totally or mostly disagreeing. The distribution of responses varied among the different types of respondents. Notably, the majority of respondents belonging or representing NCAs and the asset management sector supported the approach 1, while most respondents from the insurance sector strongly disagreed with it and favoured an approach based on existing concepts. The views of respondents representing the banking sector were divided. The majority of respondents in favour of approach 1 highlighted the limitations in the current framework and argued that the existing concepts could not cater for, or differentiate between, the wide range of ESG strategies in the market. Many also stated that the current terms were not adequate for retail investors. They also argued that new categories could allow for a potential alignment with other national regimes. Conversely, most respondents in favour of approach 2 argued that the SFDR already provided the necessary elements for sustainability assessments and disclosures and expressed concerns about regulatory stability and the associated costs of switching to a different system, which would be transferred to end-investors.

Despite diverging views on the approach to be taken, many respondents indicated that they would support a hybrid approach combining established SFDR concepts with a voluntary categorisation framework. Irrespective of the chosen approach, most respondents emphasised the importance of the categories being focused on retail investors, incorporating international frameworks, and leveraging existing national labels.

Although opinions differed on the approach to be taken, commonly agreed principles for the categories and underlying criteria emerged among respondents: (1) Retail investors-focused: A large majority of respondents stressed the importance of categories being easily understandable by retail investors. They called for simple and comparable disclosures to help retail investors grasp the products’ investment goals, strategies used to achieve them, and ESG performance monitoring. (2) International dimension: While acknowledging that full alignment with third countries’ categorisation systems may not be feasible, most respondents urged the European approach to allow for international applicability. (3) Integrating the concept of transition finance: There is overwhelming support (72% of respondents) for creating a specific category for products with a transition focus, aiming to improve the sustainability profile of the assets they invest in. (4) Asset-neutral criteria: Respondents highlighted the need for underlying criteria to be asset-neutral and applicable to all types of financial products.

The Platform also advocated in its first Briefing in December 2023 for the introduction of a common categorisation scheme to address the existing fragmentation and confusion in the European market. The Platform suggested that such categorisation:

·Should be structured in such a way to be easily understood by retail investors and used to address sustainability preferences.

·Should avoid the impression that one product’s processes are ranked better than another’s (e.g. 'best in class’ better than 'engagement' or vice versa), whereas a ranking according to the extent of transparency (e.g. Article 9 or 8) appeared suitable from a precautionary principle perspective.

·Should only be based on a thorough analysis of the intended use, how to ensure clarity of categorisation, proper evaluation of the impact of such categorisation as well as an analysis whether it should be mandatory or optional. In addition, it should be analysed whether the categorisation should be based on committed elements or actual elements of a product.

The ESAs, in their joint Opinion, made some recommendations to the Commission regarding the potential categorisation of financial products. In this vein, the Commission could consider the introduction of a product classification system based on regulatory categories and/or sustainability indicator(s) 203 to help consumers navigate the broad selection of sustainable products and support the full transition to sustainable finance. The categories should be simple with clear objective criteria or thresholds to identify which category the product falls into. The ESAs encouraged, at least, categories of ‘sustainability’ and ‘transition’. The options for product categorisation and /or sustainability indicator(s) should be consumer tested and consulted on. With clear product categories and/or sustainability indicator(s), sustainability disclosures would not need to be as detailed and extensive.

In the Study requested by the ECON Committee, the authors concur that product names, categories or “labels” are useful. However, they believe that article 8 and article 9 should not be transformed into categories, as they are too complex and unintuitive for investors. Instead, a new system, with new categories should be established. In light of investor preferences, market structure, and policy priorities, they consider that the new categories should include “impact” products and “transition” (in the sense of transition facilitating) products. The inclusion of “transition” products would make it possible for investors to choose products that, while not making investments that are sustainable, have a clear aim to bring measurable improvements to the sustainability profile of the assets invested in. Furthermore, a “sustainable” products category, though promising would need more precision. Clearer product categories would make the information more usable for investors, helping with both “greenwashing” and “green bleaching”, under certain conditions. First, all these categories should be based on consumer testing, both beforehand and ex post, to ensure that the categories work as intended. Second, products “names” need to be considered together with mechanisms that ensure measurability and accountability. Third, there should be more emphasis on market analysis, to ensure that the categories encompass a sufficiently large part of the market, and to track whether they help FMPs improve their sustainability features.

The Platform on Sustainable Finance (PSF), in its second Briefing presented in December 2024, strongly supported establishing a categorisation scheme that benefitted retail investors, and which would be usable for all investors. The proposal took consideration of the need for a smooth transition from the existing disclosure regime. The Platform recommended categorising products with the following sustainability strategies: 

·Sustainable: Contributions through Taxonomy-aligned Investments or Sustainable Investments with no significant harmful activities, or assets based on a more concise definition consistent with the EU Taxonomy.

·Transition: Investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock-ins, in line with the European Commission's recommendations on facilitating finance for the transition to a sustainable economy.

·ESG collection: Excluding significantly harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability features.

All other products would be identified as unclassified products.

The PSF argued that the proposal, to be effective, requires aligning sustainability preferences with the categories. Investors and advisors should easily identify the products that match sustainability preferences, supported by mandatory disclosures that facilitate the alignment. The categorisation of products should reflect the sustainability strategy employed in constructing each financial product.

The Platform recommended evaluating whether the scope of the categorisation should go beyond the current SFDR, considering whether all products and services under sustainability preferences in IDD/MiFID should be categorised. Furthermore, the Platform recommended to develop a common understanding on impact investing in the EU sustainable finance framework and how it relates to the EU Taxonomy (Taxonomy) and, subsequently, determine how to integrate it in the categorisation scheme.

The categorisation scheme should be grounded in the sustainability strategy of the financial product and align with an investor's values or impact objectives. Investors' sustainability values should be identified through their preferences, enabling a clear match with available products. Pre-contractual product disclosures would assist in identifying suitable options, while regular reporting should keep investors informed about the sustainability performance of their chosen products. All types of products and services relevant for IDD/MiFID sustainability preferences should be able to be classified within the scheme. Furthermore, investment options that today do not fall under SFDR should be able to demonstrate that they fulfil the category criteria and are then classified accordingly.

Categories should have precise minimum criteria, clearly defined objectives, and measurable KPIs. Products within these categories should measure and disclose their sustainability performance.

The PSF argued that the categorisation scheme proposed addressed SFDR disclosure issues such as the challenges related to inappropriate use of SFDR disclosure requirements. It aims at mitigating fragmentation due to varying national labelling regimes and different interpretations by National Competent Authorities (NCAs), auditors, and lawyers. The scheme should facilitate investment flows and sustainable economic growth by preventing fragmentation, which affects the passporting regime for investment products.

The PSF acknowledged that the proposal remained high-level, but it should serve as a basis from which to build a complete and detailed categorisation scheme. The proposal requires further development to define or refine thresholds based on real world testing.

The call for evidence confirmed a very large support for creating categories. Most respondents expressed support for creating 3 categories (sustainable, transition, and other ESG), while a small minority preferred 2 categories (sustainable and transition). A small portion of stakeholders also expressed interest for a standalone impact category, while acknowledging that impact products could also fall under the sustainable or transition category and disclose how they conduct impact investing.

The responses to the call for evidence also showed a general agreement regarding the need to align the criteria with the ESMA guidelines (i.e. the PAB and CTB exclusions). Many have also urged the Commission to ensure that the criteria will be adapted to all types of asset classes, while underlying that certain assets classes (such as derivatives, real estates and sovereigns) and facing considering challenges under the current rules. Stakeholders from the insurance and pension sectors have urged to ensure that the criteria would fit their sectoral specificities.

Finally, a majority of respondents called for due consideration of the changes expected under the omnibus proposals, and the need to reflect potential categories in product distribution rules namely under MiFID and IDD.

Annex 3: Who is affected and how?

1.Practical implications of the initiative

This initiative addresses the following problem drivers identified in the evaluation and problem definition:

·Unclear lengthy and complex disclosure requirements and ESG concepts

·Misalignments and duplication with other sustainable finance rules

·Lack of ESG data and insufficient guidance of estimations

·Disclosure articles (Art. 8 and 9) used as categorisation while not being fit for that purpose

It intends to address those problems by the following combination of preferred options:

·Option 1.2: Deletion of entity-level disclosures

·Option 2.2: Significantly reduce product-level disclosures

·Option 3.1: introduction of categorisation system with 3 categories (sustainable, transition and other ESG).

This initiative will have impacts on the following groups of stakeholders:

·Financial market participants (including SMEs): are bearing the cost of implementing the SFDR as well as potential future policy options to further develop the SFDR framework. A significant share of financial market participants are SMEs.

·Non-financial businesses: can benefit from the SFDR provisions if they are performing activities that are classified as sustainable or not harmful from an environmental, social or governance perspective and can have easier access to finance by disclosing sustainability information.

·Citizens: Would benefit from the SFDR revision by receiving in the future sustainability information for financial products in a simpler format giving higher transparency, a clearer and more visible differentiation and assuring minimum quality standards by introducing safeguards that should mitigate greenwashing risks, increase trust and confidence in such products.

·Public administrations will have one-off efforts to familiarise themselves with the updated SFDR rules. These largely follow market practices in the wake of the ESMA guidelines and are they are expected to benefit in the long-term from clearer rules and simpler disclosures.

2.Summary of costs and benefits

Table 1: Overview of costs and benefits identified in the evaluation

Estimates are gross values relative to the baseline for the preferred option as a whole (i.e. the impact of individual actions/obligations of the preferred option are aggregated together);

* The EUR 74 million is the annualised value of one-off costs amounting in total to EUR 630 million (subject to the caveats in Table 3 of section 3.10), assuming that a loan has been issued to finance the one-off burden over a period of 10 years and an interest rate of 3%.

(*) Net administrative burdens = INs – OUTs;

(**) Adjustment costs falling under the scope of the OIOO approach are the same as reported in Table 2 above. Non-annualised values;

(***) Total administrative burdens = Net administrative burdens for businesses + net administrative burdens for citizens.

Details on the costs and benefits

1.Description of the EU funds market

The SFDR seeks to harmonize existing provisions on disclosures to investors in relation to sustainability-related disclosures by imposing requirements on financial market participants (“FMP”, e.g. AIFMs and UCITS management companies and investment firms carrying out portfolio management) and financial advisers (“FA”, firms authorized under MiFID to give investment advice and credit institutions) in relation to financial products (e.g. AIFs, UCITS). The SFDR requires an enhanced level of disclosure. The nature and extent of these disclosure requirements under the regulation depend on the characteristics of products.

The table below summarises the estimated number of entities affected by the SFDR and their product volume. It is decomposed into the insurance & pension funds, banks and investment firms and investment fund sectors. For the product volume of those sectors, it is important to note that there are overlaps as insurance companies, investment firms as well as banks can invest into funds shares/units and/or provide asset management services. According to EFAMA the total volume of Assets under Management in the scope of SFDR is estimated at about EUR 16 trillion (end 2023), of which about EUR 12 trillion are reported in the database Morningstar that serves as the universe of assets, for which information on the fund volume and SFDR classification was available.

Notes to the table:

1     https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_upreg

2     https://register.eiopa.europa.eu/registers/register-of-insurance-undertakings

3    EBA FINREP data as off Q1 2025. FINREP data is available to EBA only for institutions preparing consolidated accounts.

4    EIOPA (2024): Advice to the European Commission on greenwashing risks and the supervision of sustainable finance policies https://www.eiopa.europa.eu/document/download/4de6b580-521d-4ad0-af83-2ecf133abdf4_en?filename=EIOPA-BoS-25-016_EIOPA%20IORPs%20in%20focus%20report%202024.pdf

5    EFAMA Quarterly Statistical Release Q4 2024: quarterly-statistical-release-q4-2024.pdf

6    EFAMA Asset Management Report 2024. The product volume estimated for EU investment firms includes also investment volumes managed on behalf of banks and insurers that are clients of those investment firms. Exhibit 1.2

7    EFAMA Market Insights – The European ESG Market At End Q1 2021 – Introducing the SFDR

8    According to Morningstar and other independent sources Morningstar has the most comprehensive data collection of UCITS funds in the market.

Products that have met certain ESG criteria with respect to the investment process or objective may be disclosed under Article 8 (often referred to as ‘light green’ products) or Article 9 (‘dark green’ products). All products which do not meet these criteria are disclosed under Article 6, and often considered as ‘other’ products.

1.Article 8 products consider or promote environmental or social characteristics in the pursuit of other financial objectives.

2.Article 9 products seek to make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering.

The following graph shows the evolution of Article 8, Article 9 and other funds since Q2 2021.

Source: Morningstar

Historical development: The total market size for EU funds is fluctuating around EUR 9.1 trillion since Q2 2021 with Art. 8 Funds averaging EUR 5.2 trillion (57%), Art. 9 funds 0.3 trillion (3%) and other 3.6 trillion (40%).

2. Benefits linked to the SFDR regulation

2.1. Transparency for investors to understand and compare ESG characteristics

While the two main specific objectives of this legislative review are 1) an increase of transparency, i.e. the improvement of end-investors’ ability to understand and compare sustainability-linked financial products as well as 2) a low administrative burden for the provision of such transparency, i.e. simplifying and reducing the sustainability-related administrative requirements of the framework for financial market participants, there are further impacts that go beyond these objectives. The following graph illustrates potential objectives that go beyond the cost-effective provision of transparency (outside the dotted box) as proposed in the academic literature.

Source: Kölbel et al (2020) 212  complemented by own analysis.

To put the legislative review of the SFDR into such a broader context, the paragraphs below provide scientific evidence for 1) investors demand for transparency as well as 2) indications of real-world impacts linked to sustainable investment.

2.2. Investor demand for information on ESG characteristics

As also shown in Annex 10, investors increasingly demand that their investments not only yield financial returns, but also social and environmental returns. More and more economic papers provide evidence for this, e.g.:

·Hartzmark and Susmann (Do investors value sustainability? A natural experiment examining ranking and fund flows, The Journal of Finance 74 (6), 2789-2837) show in a natural experiment approach based on Morningstar mutual fund data that when a fund's sustainability rating improved (e.g. from one ‘globe’ to five ‘globes’), it experienced a positive net flow of funds. Conversely, a decrease in a sustainability rating led to net outflows.

·Barber, Brad M., Adair Morse, and Ayako Yasuda, 2021 (Impact investing, Journal of Financial Economics 139 (1), 162-185) document that investors derive nonpecuniary utility from investing in dual-objective VC funds, thus sacrificing returns. They show both that they ex ante (in random utility/willingness-to-pay (WTP) models) accept 2.5-3.7 percentage points of lower internal rates of return for impact funds and ex post actually earn 4.7 percentage points (ppts) lower internal rates of return as compared to traditional VC funds.

·Bauer, R., Ruof T., and Smeets P, 2021: ("Get real! Individuals prefer more sustainable investments", Review of Financial Studies 34 (8), 3976–4043) run two field surveys (n = 1,669, n = 3,186) with a pension fund that grants its members a real vote on its sustainable-investment policy. Participants’ strong social preferences are demonstrated by a high demand reflected in two-thirds of participants are willing to expand the fund’s engagement with companies based on selected sustainable development goals, even when they expect engagement to hurt financial performance. Support remains strong after the fund implements the choice.

·Heeb, Kölbel, Paetzold, Zeisberger (2022): Do Investors care about impact? : The paper assesses how investors’ willingness-to-pay (WTP) for sustainable investments responds to the social impact of those investments, using a framed field experiment. While investors have a substantial WTP for sustainable investments, they do not pay significantly more for more impact. This also holds for dedicated impact investors. When investors compare several sustainable investments, their WTP responds to relative, but not to absolute, levels of impact. Regardless of investments’ impact, investors experience positive emotions when choosing sustainable investments. The findings suggest that the WTP for sustainable investments is primarily driven by an emotional, rather than a calculative, valuation of impact. (JEL D62, G11, G41, Q56)

The European Security Markets Authority (ESMA) identifies in a recent study 213 covering both UCITS and Alternative Investment Funds that the proportion of funds with ESG-related names increased significantly from less than 3% before 2015 to about 9% by mid-2024. Fund names are most likely the first piece of information investors encounter about a fund and are thus a crucial signal of the fund’s strategy and aims. Therefore, the authors analyse in a panel event study the impact of adding ESG terms to a fund’s name on funds flows. The results indicate that adding an ESG term has a significant impact on fund inflows during the five quarters following the name change with a cumulative increase in inflows over the first-year amounting to 8.9%.

While the results above, together with the findings in Annex 10, provide clear and quantifiable indications of investor demand for ESG information and also a change in the pattern of capital flows linked to higher transparency, the objective of the review of the SFDR aims in the first place to increase the quality of such transparency for investors and their ability to understand and compare ESG characteristics (specific objective 2). As the degree of understandability of such information can only be established once the technical details of the disclosures will be fixed, which will take more time and will be performed at level 2 accompanied by dedicated market and consumer studies that will help to develop the disclosures in a way that is most consumer-friendly, the exact benefit of an increased transparency cannot be measured or quantified at this stage. As such the benefit would result from a higher precision, showing ideally ESG information in a reliable manner (i.e. avoiding greenwashing) and making sure that it is correctly understood and integrated into the investment decision. This will help allocating capital in line with the preferences of investors, instead of allocating it either to companies that pretend to score high on ESG topics (greenwashing) or that are misrepresented to perform well on ESG due to a misinterpretation of unduly complex ESG disclosures.

2.3. Real world impacts including the transition

The ultimate objective of providing transparency on ESG information for financial investments translates also into a real-world impact that is expected to materialise through additional investment into technology that improves the environmental, social or governance characteristics of companies. While this goes also beyond the scope of this impact assessment, we provide here examples to put the impact assessment into a broader context and to show the big picture evidence from the academic literature on real-world impacts:

·The "Platform on Sustainable Finance report: Monitoring Capital Flows to Sustainable Investments" aims to provide insights into how capital is being allocated towards sustainable investments within the European Union. The report focuses on tracking and measuring the capital flows directed toward environmentally sustainable economic activities (aligned with the EU Taxonomy). Specifically, Taxonomy-aligned CapEx reported in 2023 increased from EUR 186 billion in 2022 to EUR 250 billion in 2023. This represents an additional investment of EUR 64 billion in Taxonomy-aligned activities year-on-year. 214

There is also evidence that establishes a link between sustainable investments and real-world outcomes beyond the EU, e.g. the reduction of CO2 emissions:

·In a paper published in 2023 the authors Bakry et al. investigate the relationship between green finance and environmental performance in 76 developing countries from 2010 to 2019. The study finds that green finance and renewable energy significantly reduce carbon emissions, emphasizing their importance for environmental sustainability. Additionally, the research confirms the Environmental Kuznets Curve, indicating that CO2 emissions initially increase with economic growth but eventually decline, and it highlights the rise in emissions due to urbanization. The findings suggest policy recommendations to further promote green finance and renewable energy to enhance environmental performance in developing regions 215 .

·The authors Huang et al. explore the impact of green finance on green innovation in China’s provinces from 2009 to 2017 in their 2022 published paper “impacts of green finance on green innovation: A spatial and non-linear perspective”. The study finds a significant positive correlation between green finance and green innovation. Both direct and indirect effects of green finance positively influence green innovation locally and in neighbouring areas. However, the effectiveness of green finance decreases as environmental regulation intensity rises. The study suggests leveraging the broader influence of green finance and green innovation to balance regional sustainable development while maintaining appropriate regulation levels 216 .

·In a paper published in 2023 the authors Udeagha and Muchapondwa examine the role of green finance and financial technology (fintech) in advancing environmental sustainability in the BRICS region from 1990 to 2020, highlighting the challenge of reducing reliance on fossil fuels and the region's untapped renewable energy potential. It finds that green finance, fintech, and energy innovation support carbon neutrality goals, while natural resources rent and economic growth impair environmental quality, aligning with the Environmental Kuznets Curve hypothesis. The study identifies bidirectional causality between CO2 emissions and green finance, fintech, and natural resources rent, with unidirectional causality from GDP and energy innovation to emissions. The paper recommends that BRICS nations enhance green financial products and expand green credit opportunities to promote sustainability 217 .

·In their 2025 published paper “Research on the impact of green finance on regional carbon emission reduction and its role mechanisms” the authors Li et al. examine how green finance policy facilitates the transition to a low-carbon economy in China, analysing 270 cities from 2010 to 2021 using the double debiased machine learning model. It finds that green finance significantly reduces regional carbon emissions by supporting green technology innovation and optimizing industrial structures. The effects are more pronounced in the eastern region and non-resource-based cities compared to central and western regions and resource-dependent cities. Additionally, policies like "Broadband China," information consumption pilots, and big data zones enhance the impact of green finance on emission reductions. The study provides insights and policy support for leveraging green finance to advance sustainable economic development 218 .

·The authors Meo and Karim investigated the relationship between green finance and CO2 emissions in the top ten economies supporting green finance in their paper “The role of green finance reducing CO2emissions: An empirical analysis” published in 2022. This research confirms that green finance generally reduces CO2 emissions, though the impact varies based on market conditions and country-specific circumstances. The findings suggest that green finance is an effective financial strategy for decreasing CO2 emissions, with its effects influenced by variations in market conditions and the specific contexts of each country 219 .

·In a 2024 published study Meryem Filiz Bastürk explores the impact of green finance on carbon emissions globally, in light of increased environmental awareness through frameworks like the sustainable development goals and the Paris Agreement. Using the system generalized method of moments, she analyses data from 48 countries between 2017 and 2022. The findings demonstrate that green finance, particularly through green bonds, significantly reduces carbon emissions, with a 1% increase in green bonds leading to a 0.012% decrease in emissions 220 .

3. Description of respondent sample with cost information

One of the two specific objectives of the SFDR review is keeping the administrative burden for providers of financial products in check. Hence, it is important to establish first a baseline that shows an estimate of the administrative burden linked to the SFDR in the EU.

3.1. Source of information

As outlined in Annex 2, the Commission performed a targeted stakeholder consultation on the SFDR in the period 14 September 2023 - 22 December 2023. As part of this consultation, respondents were asked to report their one-off and recurrent costs related to SFDR disclosures.

3.2. One-off and recurrent costs

What is meant by one-off and recurrent costs? One-off costs are costs that are incurred only once by businesses that need to adapt to a new or amended piece of legislation or regulation. In the context of the SFDR they cover internal and external costs of financial market participants and financial advisers (or consolidated groups of such entities) for familiarising themselves with the new regulatory landscape and for updating internal processes and IT-systems accordingly. Recurrent costs occur after the one-off adaptation process is finished and cover annual costs for product and entity level disclosures. While a new product launch involves also certain one-off costs from a product perspective (e.g. registration, development of marketing material, preparation of pre-contractual disclosures, etc.), these costs are classified as recurrent from an entity perspective as new products are launched on a recurring basis, e.g. every year.

3.3. Administrative and substantive compliance costs

From a better regulation perspective, the one-off and recurrent costs are classified as administrative costs as the SFDR is a disclosure regime and the costs are linked to information obligations. Hence no additional compliance costs linked to changes in core business functions (beyond reporting and disclosure) apply for the SFDR.

3.4 Description of respondent sample

In total 17 respondents provided both one-off and recurring costs of SFDR disclosures.

The costs reported had to be decomposed to entity level and product level disclosures. For each respondent, the total reported costs were split in accordance with the reported entity-product level split. On average respondents reported spending about 74 percent for product level and 26 percent for entity level disclosures. 221  

Figure 1: Overview of replies

Source: Stakeholder consultation

The 17 respondents with comprehensive cost information in the sample reported in total about EUR 29 million of one-off implementation costs (0.002% of their AUM) and EUR 10 million of annually recurring costs (0.001% of their AUM).

3.5. Representativeness of sample

The 17 respondents with comprehensive cost information (i.e. one-off and recurring costs as well as a split between entity- and product level disclosures) for the SFDR are representing about 9% of the market measured by AUM.

Source: Population: Morningstar and sample obtained in open public consultation.

The table above shows companies of each size bucket are represented in the sample and also in the Morningstar population.

Furthermore, a decomposition into the classical categories of large companies and SME shows that both large and SME companies are represented in the sample and in the Morningstar population and data of both groups is hence considered in the cost estimations.

Source: Sample obtained in open public consultation.

3.6. Initial analysis of cost sample

An analysis by size has shown that there are strong fixed cost degression effects, meaning that large financial market participants spend significantly lower percentages of their AUM on SFDR disclosures.

If both the cost information in % of AuM and the AuM were plotted on a logarithmic scale, an approximately linear relationship could be established. This means, moving for one unit on the x-axis, i.e. increasing the AuM by a factor of 10, led on average to a decrease of the costs expressed as a share of AuM by about 2/3rds or 67%. E.g. if an asset manager with EUR 40 000 million of AUM has costs of 7%, the costs decrease by about 2/3rd to about 2% if the asset manager grows by a factor of 10, i.e. to EUR 400 000 million of AuM.

Figure 2: Recurring entity level costs

Figure 3: One-off entity level costs

Figure 4: Recurring product level costs

Figure 5: One-off product level costs

Based on the sample cost observations, a regression analysis has been performed to determine a cost function that estimates the relative costs (expressed as a percentage of AUM) as a dependent variable of AUM for entity level disclosures and of sustainable AUM (i.e. SFDR Art. 8 disclosing funds plus Art. 9 disclosing funds) for product related disclosures. The methodology varies for entity and product level disclosures as entity level disclosures apply to all financial market participants whereas product level disclosures apply only to financial market participants disclosing either under Art. 8 or Art. 9.

3.7. Baseline scenario and application of the standard cost model 223

The standard cost model assumes that an entity has to fill out a form to provide a disclosure and that the effort needed to provide this disclosure is independent from the entity-size and other characteristics of the business. This means that the costs of disclosure are approximately identical for all entities.

Source: Tool #58 EU Standard Cost Model of the Better Regulation Toolbox July 2023 224

If this assumption was applicable, it would be possible to pool the cost observations and to take e.g. the average cost and multiply it with the number of entities in the market and the frequency of disclosing information. However, as demonstrated in the previous section this is not the case for the SFDR disclosures and the costs vary by type of entity, in particular with the size of the entity.

The following methodological approach has therefore been taken to estimate the administrative burdens:

(1)Estimate of an SFDR related disclosure costs: we have collected a sample of costs (N=17) for product- and entity-related disclosures from the replies received in the stakeholder consultation. The replies covered all essential elements of disclosure preparation including internal costs for personnel and IT as well as external costs for data providers and consulting. From this sample, using a statistical regression model, a cost function has been estimated for the following cost types:

·One-off costs product level disclosures

·Recurring costs product level disclosures

·One-off costs entity level disclosures

·Recurring costs entity level disclosures

(2)The database Morningstar provides data for assets under management of funds that are obliged to disclose under the SFDR for the whole EU market and allows for a drill-down to the funds level, i.e. to aggregate the AuM per fund. The four cost functions for the four cost-types mentioned above (Figure 2 to Figure 5) have been used to estimate the one-off and recurring costs for entity and product-level disclosures as a function of AuM for each fund in the EU market.

The costs have been aggregated for the EU market by summing the individual estimates over all funds that were recorded by Morningstar.

Table 2: Cost estimate one-off and recurring costs for product and entity level disclosures

Source: Stakeholder consultation, Morningstar and own calculations

The table above summarizes the result for the costs estimated for the European market. We estimate that financial market participants have spent one-off implementation costs amounting to EUR 120 million for entity level disclosures and EUR 380 million for product level disclosures under the SFDR. Furthermore, we estimate annual recurring costs of EUR 56 million for entity-level and EUR 190 million for product-level disclosures. The recurring costs are assumed to constitute the costs of the baseline scenario.

3.8. Role of the omnibus proposal for the baseline scenario

Since 2021, the companies that have to disclose information under the SFDR have operated in an environment with data gaps, that have been filled by data providers and ESG rating agencies either with information that has been manually requested from the investee companies via questionnaires or if not available with estimates, e.g. with statistical estimates obtained from companies operating in a similar industry, of similar size, in a specific region, and other comparable characteristics. The data situation has improved over time. An analysis performed by the Joint Committee of the European Supervisory Authorities (ESMA, EBA and EIOPA) in 2024, reproduced in the table below, shows that key mandatory principle adverse indicators that are relevant for the SFDR are increasingly available with (green >80% median coverage; red <=20% low coverage; yellow 20-80% medium coverage) 226 .

Source: Joint Committee of the European Supervisory Authorities, JC-2024-69: Principal Adverse Impact disclosures under the Sustainable Finance Disclosure Regulation

The CSRD (original and post-omnibus timetables below) in its original (pre-omnibus scope) would have improved the data availability with coverage of European investees covering both listed and unlisted large companies as well as certain SMEs (parents of large groups).

The timeline below shows that public interest entities (PIEs), i.e. those companies that are the investees, that to a major extent constitute the portfolio population of the funds that are subject to the SFDR would have started to report in Q1 2025, which was not postponed by the Omnibus proposal 227 .

Source: European Commission, SWD (2025) 80, Omnibus proposal.

The SFDR data requirements concern mainly listed companies as it regulates disclosures of enterprises offering investment products consisting largely of listed investees with the exception of alternative investment funds and venture capital funds that hold also private non-listed assets. According to ECB data Euro-area Non-Financial Corporations had outstanding listed debt of EUR 1.6 trillion 229 and listed shares of EUR 7.6 trillion 230 by the end of 2023, of which investment funds held 34% and 24% respectively 231 , a total of EUR 2,4 trillion of listed securities. Expressed as a share of EU assets under management of about EUR 16 trillion, this represents about 15%. These investees are subject to CSRD reporting.

CSRD wave 1 companies, i.e. companies that were subject to the NFRD and started reporting under the CSRD/ESRS for fiscal year 2024 (i.e., publication in 2025) are thus key investees for SFDR reporting. These companies will not be affected retroactively by the planned scope reductions ("stop-the-clock" or omnibus proposals) as these reductions primarily impact companies covered in later CSRD waves. Rather, a replacement can be expected of currently either estimated values or data collected with questionnaires by data from audited sustainability reporting for about 15% of the investee universe. This data collection step would usually be performed by data providers, which do continue providing ESG data to financial market participants with or without the omnibus and we do not expect that this improvement of quality for certain datapoints would have significant impact on the data provider fees charged to financial market participants.

3.9. Who is bearing the cost of the SFDR implementation?

While in absolute terms the amounts reported for one-off and recurring costs in our sample for the SFDR implementation seem high (ranging up to EUR 29 million of one-off investment and up to EUR 10 million of annual recurring costs for one FMP), in relative terms, the costs, e.g. for large FMP (with AuM > EUR 25 billion) that dominate the market in terms of product volume (about 75% in the Morningstar funds population), are in a range of 0.002-0.15 basis points (one basis point is only 1/100 one hundredth of one percentage point) for annual recurring costs and 0.01 to 0.46 basis points for one-off costs, that are usually written off over several years by businesses. This indicates that even if the fees were 100% passed on to end-investors, they should not face substantial changes in the transaction fees. This is in line with observations of ESMA that has shown, e.g. that the fees of UCITS funds have not significantly changed in the period 2021-2023. 232 Furthermore ESMA has shown in the same publication that there are no significant differences in the fees charged for ESG UCITS and general UCITS funds.

To gauge further the economic significance of these costs as compared to the benefits, if these amounts were instead used to directly reduce CO2-emmissions, taking into account that EEA reports that the EU-27 countries emitted around 2 907 204 kilo tonnes of CO2 in 2020 233 and a price of about 96.3 EUR per tonne of CO2 234 , they would achieve annual savings of 0.1% Co2 emissions. In other words, it suffices that SFDR achieves an annual reduction of 0.1% in Co2 emissions in order for the associated costs to be justified.

3.10. Estimation of cost impacts of the preferred set of options

In the following, we estimate the cost impacts of the preferred set of options. For this, we split first the costs obtained in the evaluation for the baseline scenario into costs for SME and Large companies.

Table 3:    Administrative costs baseline scenario and cost impact preferred options 235

Source: Stakeholder consultation and own calculations. Results give only indications of potential costs and are to be interpreted with caution as they are based on extremely small samples, in particular for SMEs where the simplification should bring most benefits; the one-off costs might be overestimated as the one/two respondents on which the estimation is based assume a certain minimum fixed amount that needs to be spent to implement the changes that is even higher than the initial one-off costs.

The cost calculations presented above are only rough indications as most respondents were not able to estimate costs as at the preparatory stage of level 1, including without the technical details to be specified in level 2. Therefore, only anecdotal evidence could be collected that can give a rough indication of the cost impacts of this regulation. The results suggest that SMEs (which would choose to be active in offering ESG products) might expect significant one-off costs that can be offset in the long-term by corresponding cost savings, whereas large businesses have only limited one-off costs and are likely to set these investments off quickly (after about 2 years). As part of the level 2 work, European Supervisory Authorities should verify the plausibility of these estimations once detailed proposals have been worked out, and if respondents indicate that they expect significantly different costs, the cost implications should be taken into account when deciding on the preferred option to make sure that the objective of administrative simplification and burden reduction is met.

3.11 Summary costs, benefits and one-in-one-out calculation

Estimates are gross values relative to the baseline for the preferred option as a whole (i.e. the impact of individual actions/obligations of the preferred option are aggregated together);

* The EUR 74 million is the annualised value of one-off costs amounting in total to EUR 630 million (subject to the caveats in Table 3 of section 3.10), assuming that a loan has been issued to finance the one-off burden over a period of 10 years and an interest rate of 3%

(*) Net administrative burdens = INs – OUTs;

(**) Adjustment costs falling under the scope of the OIOO approach are the same as reported in Table 2 above. Non-annualised values;

(***) Total administrative burdens = Net administrative burdens for businesses + net administrative burdens for citizens.

Relevant sustainable development goals

Annex 4: Analytical methods

Estimation of Administrative Costs and Burdens

For the estimate of the SFDR related costs for businesses that are classified as administrative costs in the Better Regulation terminology, the standard cost model (see Tool #58 EU Standard Cost Model of the Better Regulation Toolbox July 2023) has been used. 244 The data to perform the cost estimations has been taken from the stakeholder consultation and has been scaled-up for the whole European market. Please refer to section 3.7 in Annex 3 for a description of the details.

.

Annex 5: Competitiveness check

1.Overview of impacts on competitiveness 

2.Synthetic assessment 

The combination of the preferred options presented in Section 8 have a positive impact across all the dimensions of competitiveness above.

On cost and price competitiveness, the options are expected to reduce compliance costs to a significant extent, as detailed in Annex 3. The options are set to help EU FMPs improve their cost competitiveness by addressing many of the identified undue burdens and excessive compliance costs associated with the status quo. The preferred option to alleviate burdens and costs of reporting will remove duplications and inconsistencies, facilitating market entry. The preferred option to set up a clear and coherent categorisation system for sustainability-linked financial products reflects current market practices to a large extent, entailing minimal adjustment costs compared to the alternatives. These costs are expected to be outweighed by the economic benefits of continued investment flows according to a simpler, clearer and more intuitive categorisation of products.

Given the EU’s overwhelming market share for sustainable financial products globally, a positive impact is also to be expected on international competitiveness. The competitive position of EU FMPs and funds in launching and providing services in relation to sustainability-linked financial products would be further bolstered. Through lower costs arising from the removal of undue burdens and a simpler categorisation regime for products, the EU market for sustainable products can also be expected to grow, to help scale up the flow of private savings and investments into the real economy and its transition towards more sustainable economic practices. Given the dominant size of the EU market in this area, the categorisation regime can be expected to become a de facto global standard and contribute to attracting inward investment flows into the EU.

The market’s capacity to innovate is also positively supported by reduced reporting burdens and clear product categories. Lower compliance costs can help free up FMPs’ resources for product innovation. The criteria underpinning the categories leave room for flexibility allowing FMPs to design products according to diverse parameters, while providing the essential reassurance to retail investors about what their products can and cannot invest in. The criteria would be future-proof and allow to continue designing and innovating products according to emerging technological trends and evolutions in science and environmental policy. Overall, provided FMPs seize opportunities to design products in accordance with a simple categorisation system, increased funds toward private sustainability-oriented innovations in the real economy can be expected to ensue, supporting the flow of additional private risk capital toward the twin green and digital transitions to finance the EU’s long-term climate and competitiveness goals.

In terms of sectors which are most likely to be impacted, some negative effects could arise for those targeted by the PAB/CTB exclusions, namely tobacco, controversial weapons, and companies involved in human rights violations or heavily in fossil fuels. However, this would continue their treatment under PAB/CTB benchmarks, and would not apply beyond ESG-focused financial products. Non-ESG focused products could still fully include these companies at FMPs’ and investors’ discretion. Conversely, the creation of categories could support positive impacts notably in sectors associated with high levels of environmental and social progress (sustainable category), those undertaking meaningful improvement toward less harmful environmental or social practices (transition category), and those which can be accommodated in various other diverse ESG strategies (other ESG category). For instance, the sustainable category could further help boost investment in EU companies with Taxonomy-aligned activities, in key Taxonomy-eligible sectors such as renewable energies, transport, manufacturing and real estate 245 . For its part, the transition category could help facilitate investment toward a wide range of sectors for which meaningful transition-trajectories are most advanced or under development. For example, a key metric in this context would be the market-led Science-Based Targets initiative, which has gathered commitments from over 10000 companies across the world (53% from Europe), with the highest number in the services and manufacturing sectors 246 . Finally, the third category could encompass a variety of sectors pursuing diverse ESG strategies, and appeal notably to investors interested in a diversified product with clear ESG-based exclusions 247 .

Finally, the initiative is also expected to have a positive impact on SME competitiveness. Together with the provisions of the Omnibus (i.e. removal of listed SMEs from the scope, value chain cap applicable to companies outside the CSRD to limit trickle-down effects, single voluntary standard for companies outside the CSRD), SMEs can benefit from the flow of funds and be included in products under a simple categorisation system, as well as from lower reporting and compliance costs incumbent on FMPs. While SMEs may typically not constitute a large share of the portfolios of investees within mainstream (UCITS) financial products, the simplification of disclosures and clear criteria underpinning categories could support some reallocation of portfolios toward greater inclusion of SMEs, including through greater clarity on the use of estimates and proxies. This could stem from addressing any bias in favour of larger listed companies from whom granular data is more available.

Annex 6: Interactions between the SFDR and the sustainable finance and broader corporate sustainability framework

This annex aims at explaining the interactions between the SFDR and the rest of the sustainable finance and broader corporate sustainability framework. It also highlights the specific considerations that need to be taken into account for the review regarding the links and necessary alignments between the SFDR and the CSRD, the EU Taxonomy Regulation, the Benchmark Regulation, CSDDD and the MiFID/IDD sustainability delegated act.

1.The EU sustainability disclosure regimes and tools that feed into the SFDR

Corporate Reporting Disclosure Directive (CSRD)

What is the CSRD

The Corporate Sustainability Reporting Directive (CSRD) modernised and strengthened the rules concerning the disclosure of sustainability information by undertakings in response to the increased demand for corporate sustainability information and transparency. The existing CSRD requires that large undertakings and listed SMEs disclose information necessary to understand the undertaking’s impacts on sustainability (ESG) matters, and information necessary to understand how sustainability matters affect the undertaking’s development, performance and position. The CSRD phases in the reporting requirements for different categories of undertakings.

The reporting requirements are specified in European Sustainability Reporting Standards (ESRS), which were developed in draft form by EFRAG and adopted by the Commission via Delegated Regulation 2023/2772.

How does it interact with the SFDR

FMPs rely on ESG information disclosed by investee companies under the CSRD (the ‘European Sustainability Reporting Standards’, or ESRS) to assess the principal adverse impacts (PAIs) of their investments. To this end, the ESRS mirrors the PAIs to ensure FMPs get the information needed.

However, the CSRD does not cover all entities/assets that FMPs invest in. For example, the CSRD does not apply to most third-country companies. In the EU, the CSRD currently applies to all large companies and all listed companies (including listed SMEs and non-EU companies listed in EU). It also applies to non-EU companies that generate more than EUR 150 million in the EU and have either an EU branch with turnover above 40 million or an EU subsidiary that is itself in CSRD scope. This scope represents on average 30% of EU portfolios. To bridge the data gaps, FMPs are using estimates.

In addition, the recent omnibus Commission proposal reduces the CSRD scope. Reporting obligations would apply only to large companies with more than 1000 employees (i.e. companies with more than 1000 employees and either turnover above EUR 50 million or balance sheet above EUR 25 million). Non-EU companies in scope would be reduced to the ones generating a turnover above EUR 450 million, with an EU branch threshold set at EUR 50 million and EU subsidiary threshold set at “large’. The ESRS are also expected to be streamlined.

Special considerations for the review: the disclosures and criteria need to take account of the upcoming loss of publicly available data from CSRD companies. The need to generate/buy estimates is expected to grow.

EU Taxonomy Regulation

What is the EU taxonomy

The EU Taxonomy provides a classification system of environmentally sustainable economic activities. It helps address the risk of greenwashing and supports investors in directing their capital towards the activities needed for the green transition. The EU Taxonomy can also serve as a tool for financial and non-financial undertakings to plan and communicate on their business strategies, transition planning, as well as their investing and lending activities for the transition to a low-carbon, sustainable economy.

How does it interact with the SFDR

Financial products promoting environmental characteristics or having an environmental objective are required to regularly disclose their alignment with the EU Taxonomy.

The recent Commission proposals pursuant to the Omnibus simplify the reporting templates, leading to a reduction of data points by 64-89% depending on the type of company, introduces a materiality threshold to make disclosure of alignment for companies with less 10% eligible activities not mandatory, introduces the option of reporting partial alignment to foster transition finance, reduces the scope for mandatory reporting on operational expenditure and simplifies certain criteria 248 .

Special considerations for the review: same as for the CSRD

Benchmark Regulation

What ESG disclosures does the Benchmark Regulation provide

The Benchmark Regulation (BMR) introduced disclosure requirements for all EU benchmarks with ESG factors, mandating administrators to disclose whether they integrate ESG in their benchmark design, and if so how. BMR also requires benchmark administrators of EU Climate Benchmarks, i.e. Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) to regularly report on the performance of their benchmarks against a set of sustainability-related Key Performance Indicators (KPIs). Their methodologies rely on minimum technical requirements focused on decarbonisation trajectory and activity exclusions. Exclusions encompass companies that significantly harm one or more environmental objectives set out in the Taxonomy Regulation. PABs and CTBs are designed to reorient investment towards ESG opportunities rather than focusing on simple risk reduction, in line with the objectives of a transition to a climate-resilient economy.

How does it interact with the SFDR

ESG disclosures from benchmark administrators are indispensable for FMPs relying on benchmarks for their ESG features of their portfolio. In addition, SFDR Art.9(3) recognises EU climate benchmarks as a robust investment strategy for funds having as their objective a reduction in carbon emissions. They are widely used as reliable labels for investment products pursuing a sustainable investment objective.

Special considerations for the review: the future SFDR criteria must ensure alignment with the criteria of the EU Climate Benchmarks to ensure these can be recognised as a robust way to comply with the categories. Products following such benchmarks should automatically be recognised under the relevant category. In addition, the future SFDR disclosures should take the benchmark disclosures into account to avoid situations in which FMPs cannot get necessary data on the indices they use (to the extent possible.

European Green Bonds standard

EUGBS is a voluntary standard to help scale up and raise the environmental ambitions of the green bond market. It sets a gold standard for how companies and public authorities can use green bonds to raise funds on capital markets to finance ambitious large-scale green investments, while meeting high sustainability requirements and protecting investors. The use of proceeds must be 100% aligned with the EU Taxonomy Regulation, with the exception of the so-called flexibility pocket up to 15%, ensuring that financed projects contribute substantially to at least one of the six environmental objectives, do no significant harm to others, and meet minimum social safeguards. Both EU-based and international private or public issuers can adopt the standard, making it a potential global benchmark.

How can this tool be used under the SFDR

It can help investors to easily assess, compare and verify that their investments are sustainable and ensure that funds are allocated to taxonomy-aligned economic activities, thereby reducing greenwashing risks.

2.SFDR information feeds into the sustainability preferences and target market under MiFID and IDD delegated acts

These rules introduced the notion retail investors’ sustainability preferences as part of the suitability test in investment and insurance advice. Investors are given the opportunity to set minimum sustainability requirements for their investments which can be expressed in relation to SFDR disclosures (proportion of taxonomy-aligned investment, proportion of sustainable investment, consideration of principal adverse impact). Distributors therefore rely on products’ information made available under the SFDR to match retail investors’ preferences.

Consideration for the review: The future SFDR categories should be designed in a way that is easily understandable for retail investors to ease the implementation of the suitability test. In addition, the scope of financial products that can be distributed under MiFID and IDD is broader than the SFDR scope (e.g. shares, bonds, derivatives, structured notes…). The review should explore whether some of these products (especially structured notes) should be scoped in the SFDR to avoid greenwashing and ease as much as possible the implementation of the rules by distributors.

3.Further considerations regarding other specific parts of the EU acquis

Corporate Sustainability Due Diligence Directive (CSDDD)

The CSDDD requires very large companies and ultimate parent companies of groups domiciled or active in the EU to conduct due diligence to identify and address adverse human rights and environmental impacts in their own operations, their subsidiaries and their value chains. It also requires them to adopt a transition plan for climate change mitigation.

How does it interact with the SFDR

Compliance with the CSDDD entails that companies under the scope will be either sustainable or on a credible path to sustainability with respect to human rights impacts and those environmental impacts that are regulated by the international conventions listed in the Annex of the Directive, and will have adopted relevant good governance and management practices. These due diligence efforts and compliance with the CSDDD can influence investment decisions under the SFDR. In turn, the SFDR has the potential to help companies under the CSDDD finance their sustainability transition.

Shareholder rights Directive, Green Claims Directive, EU Ecolabel, Unfair Commercial Practices Directive

4.The Shareholder Rights Directive (SRD), as amended in 2017, sets out “comply or explain” rules for institutional investors and asset managers with respect to their engagement and investment policies. Its Chapter Ib entered into application in June 2019 and requires institutional investors and asset managers to be more transparent about their investment strategies, their engagement policies and the implementation thereof. These “entity-level” rules help investors and ultimate beneficiaries such as future pensioners, life insurance policy holders and investment fund unit holders to optimise their investment decisions, also taking into account their preferences, including with respect to the long-term non-financial performance of the investee companies. As regards the (proposed) Green Claims Directive, SFDR disclosures are distinct as the directive does not apply to mandatory or voluntary sustainability information required under EU financial services rules including in the areas governed by the SFDR. The SFDR is also distinct from the mooted project to create an EU ecolabel for financial products, which could have led to a system of granting an EU-level sustainability label to certain funds based on defined conditions, but which is currently on hold 249 . Finally, the Unfair Commercial Practices Directive 250 and its subsequent Commission guidance on unfair business-to-consumer commercial practices 251  provides examples of what constitute misleading environmental claims or green claims, which apply horizontally to all commercial products and are meant to complement existing rules that take into account the specific features of financial products. Claims under the revised SFDR could fall within the definition of ‘environmental claims’ under Article 2(1)(o) of the Directive, the requirements of which would be met by application of the requirements under the SFDR (consistent with Article 3(4) and (9) of that Directive). ESMA guidelines on fund names

In May 2024, ESMA issued its final guidelines 252 for funds marketed in the EU that use ESG- or sustainability-related terms in their names. The guidelines, which aim at protecting investors against greenwashing risk, set minimum requirements. Fund managers had until May 21, 2025, to either align with the requirements or change fund names to ensure compliance. Consistent with the personal scope of the Sustainable Finance Disclosure Regulation, the guidelines are directed at fund managers 253 marketing funds in the EU.

5.How the Omnibus interacts with the SFDR review