In depth

Deep dive into the key characteristics of the EU sustainable finance regulation

Sustainable Finance Disclosure Regulation (SFDR)

Sustainable Finance Disclosure Regulation (SFDR)

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The Sustainable Finance Disclosure Regulation (SFDR – Regulation (EU) 2019/2088) is a Regulation introduced by the European Commission to improve transparency in the market for sustainable investment products, prevent greenwashing and increase transparency around sustainability claims made by financial market participants.

It introduces mandatory information on a broad range of environmental, social & governance (ESG) metrics that Financial Market Participants (FMPs)(1) must disclose at the entity and at product level.

In particular, SFDR requires FMPs to disclose information at entity level, on how they incorporate sustainability risks into their investment decision-making processes (Art. 3 I SFDR).

Whilst reform efforts are currently ongoing to revise the product categorisation framework under SFDR 2.0, the current Article 6, 8 and 9 regime remains in force, and the categories operate as follows (see further information on the proposed reform below):

  • For all their financial products, FMPs have to disclose information on how they integrate sustainability risks into the investment decisions and the impacts sustainability risks may have (6 I SFDR). If FMPs deem sustainability risks as not material risks for their investments, they must disclose the reasons in the financial products’ pre-contractual documents (e.g., prospectus);
  • FMPs don’t have to disclose any additional sustainability-related information for those products which do not have additional characteristics linked to sustainability. These products which do not have any sustainability ambition are commonly referred to as “Art. 6 products”;
  • FMPs must disclose additional information – including the information on sustainability risks – for products that either “promote environmental and or social characteristics” (Art. 8 I SFDR) or have “sustainable investments as their objectives” (Art. 9 I SFDR). These products are commonly referred to respectively as “Art. 8 products” or “Art. 9 products”.

In addition, SFDR has been complemented by a set of Regulatory Technical Standards (SFDR-RTS – Commission Delegated Regulation (EU) 2022/1288), which further detail the information FMPs must disclose by introducing, amongst others, a set of disclosure templates for products promoting environmental and/or social characteristics (Art. 8 I SFDR) and for products having sustainable investments as their objective (Art. 9 I SFDR).

The SFDR-RTS also detail the concept of Principal Adverse Impacts (PAIs). PAIs are environmental and social-related indicators that assess the (negative) impacts that investment decisions taken by FMPs have on sustainability factors, such as environmental and social issues. The SFDR-RTS divide the PAI indicators into three tables, which are included in Annex I:

  • Table 1: Mandatory environmental and social indicators for investments in investee companies (14 indicators), sovereigns and supranationals (2 indicators), and real estate assets (2 indicators). Examples of these indicators are: GHG emissions, activities negatively affecting biodiversity-sensitive areas, and board gender diversity;
  • Table 2: Additional optional environmental indicators for investments in investee companies (16 indicators), sovereigns and supranationals (1 indicators), and real estate assets (5 indicators). Examples of these indicators are: emissions of air pollutants, water usage and recycling, and raw materials consumption for new construction and major renovations;
  • Table 3: Additional optional social indicators for investments in investee companies (17 indicators) and in sovereign and supranationals (7 indicators). Examples of these indicators are: rate of accidents, insufficient whistleblower protection, and lack of anti-corruption and anti-bribery policies.

Please note, a further revision of the SFDR-RTS, covering PAI disclosures and decarbonisation targets, was proposed by the ESAs in December 2023 but has not yet been adopted, with its progress now linked to the wider SFDR 2.0 reform process.

 

SFDR Review: High level overview

On 20 November 2025, the European Commission published a proposal for a comprehensive overhaul of SFDR (“SFDR 2.0”). The proposal is intended to address shortcomings in the current framework by simplifying the rules and aligning disclosure requirements with other EU sustainability frameworks, with a view to increasing efficiency and reducing reporting costs for firms.

Key changes proposed include:

  • A new product categorisation regime for financial products making ESG claims, replacing the existing Article 8 and Article 9 disclosure regime. Strict eligibility criteria are proposed for each of three new categories:”Sustainable”, “Transition” and “ESG Basics”, addressing regulators’ concerns that the current disclosure regime has, in practice, been used as a de facto product labelling regime (with most products able to claim Article 8 alignment relatively easily under the existing rules);
  • Strict limitations on ESG marketing and disclosures for products that fall outside the new categorisation regime;
  • Removal of portfolio management and investment advice from the scope of SFDR altogether;
  • Removal of the definition of “sustainable investments”, along with the “do no significant harm” principle and “good governance” requirements, these concepts are instead intended to be captured through mandatory exclusions and other qualifying criteria attached to each product category;
  • Removal of entity-level requirements for PAI reporting and for disclosures on how sustainability risks are factored into remuneration policies;
  • Streamlining of disclosure and reporting obligations more broadly; and
  • Narrowing mandatory Taxonomy-related disclosures to Article 7 (“Transition”) and Article 9 (“Sustainable”) products pursuing an environmental objective.

Please see section “What are the key dates” for further information on current status and timelines.

Notes: 

(1) In general, FMPs are actors that take part in the market by purchasing and offering financial assets. Amongst others, FMPs in scope are: Alternative investment fund managers (AIFMs); UCITS management companies; Investment firms; Credit institutions providing portfolio management services.

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