The Sustainable Finance Disclosure Regulation

The EU's Regulation on sustainability‐related disclosures in the financial services sector (the SFDR) was published on 9 December 2019 and amended by the Taxonomy Regulation, published on 22 June 2020. Its provisions have been in force since 10 March 2021.

What does the SFDR cover?

The SFDR imposes transparency and disclosure requirements on financial market participants (FMPs), namely:

• AIFMs;
• UCITS managers; and
• MiFID firms providing the service of portfolio management

in respect of the integration of sustainability risks in the investment decision-making process and advisory processes.

It addresses concerns that disclosures in the above sectors were unsystematic and inconsistent, by requiring in-scope firms to:

• publish written policies on how they integrate sustainability risks in their investment decision-making process;
• make pre-contractual disclosures on how they incorporate sustainability risks in their businesses;
• comply with pre-contractual transparency rules on sustainable investments;
• publish an online description of their sustainable investments target and information on the methodologies they use to assess, evaluate and monitor the effectiveness of investments;
• describe in periodic reports the specification of the impact of their sustainable investments by means of relevant sustainability indicators; and
• ensure that all the information published on their websites is kept up-to-date, including a clear explanation of any amendments to the published information.

Many aspects of the SFDR will apply to all asset managers, even those which do not have an express ESG-focus or sustainability-focus (although some aspects will be relevant only when a financial product has a specific ESG-focus).

Where do things stand?

(a) Level 1

The Level 1 text of the EU's Regulation on sustainability‐related disclosures in the financial services sector (the SFDR) was published on 9 December 2019. It was later amended by the Taxonomy Regulation, published on 22 June 2020.

The consolidated Level 1 measures have been in force since 10 March 2021.

---

ESG Ratings Regulation

In December 2024, a new Article 13(3) was inserted into the SFDR by the publication of the ESG Rating Regulation.

This provides that, where, as part of its marketing communications, an FMP issues and discloses an ESG rating (as defined in Article 3(1) of the ESG Rating Regulation) to a third party, it must

• include on its website the same information as required by Annex III, point 1 of the ESG Ratings Regulation and
• disclose a link to these website disclosures in its marketing communications.

The ESAs have been mandated to develop draft RTS, specifying the information required by the above provision, taking into account the information already disclosed under Article 10 of the SFDR.

The new Article 13(3) will apply from 2 July 2026.

---

SFDR Review

The SFDR contains a review clause, which requires the Commission to evaluate the application of the Regulation.

Commission proposal for a new Regulation, amending the SFDR

On 20 November 2025, the Commission adopted a legislative proposal for a new Regulation which would make significant changes to the Level 1 text of the SFDR. These include (among other things):

• removing the current Article 8 / Article 9 regime, with no specific grandfathering regime and its replacement with three mandatory product categories.
• removing the Principal Adverse Impact (PAI) regime at both management entity level and product level.
• embodying new naming and marketing restrictions in the SFDR, relating to use of sustainability terminology.

In addition, the proposal seeks to simplify sustainability reporting for companies, in order to align with the Commission’s Omnibus proposals.

The legislative proposal will be subject to a period of scrutiny by the Council of the EU and the European Parliament. These will assess what changes they wish to see to the Commission’s draft and then negotiate an agreed final text, which will be translated and published in the Official Journal before it takes effect.

For our client note summarising the key points of the Commission’s legislative proposal, see here.

For our client note on the Commission's Omnibus packages, see here

Work leading to the Commission’s legislative proposal

The legislative proposal followed a number of consultations as well as other preparatory work.

Its work was also informed by a number of preparatory publications (see below) which, while they do not bind the Commission, helped give an indication of overall direction of travel.

(a) Commission consultations

(i) Public and targeted consultations

In September 2023, the Commission launched two public consultations - one a "public" consultation, the second a "targeted" one.

These did not propose any specific new rules but the questions and associated commentary they set out strongly indicate that the Commission's intention is to propose fundamental changes to the policy concept of SFDR.

The consultation periods closed on 15 December 2023.

A Simmons client note summarising the key points of the targeted consultation can be found here.

(ii) Commission Call for Evidence

On 2 May 2025, the European Commission published a Call for Evidence (CfE) on revisions to the SFDR which could help address a number of perceived issues with the current SFDR, including:

• simplifying key concepts
• streamlining and reducing disclosure requirements and/or
• introducing categories of financial products that make sustainability-related claims.

The CfE notes that, if new product categories were to be introduced, these should

• be easily understandable by retail investors
• accommodate different sustainability objectives reflecting EU goals and
• take into consideration, in an appropriate way, current market practices in terms of available data and sustainability-oriented financial products on offer.

The CfE closed on 30 May 2025.

Our summary of the CfE can be found here.

(b) Other Preparatory work

The SFDR regime distinguishes between ‘Article 8 funds’ (which promote specified environmental or social characteristics) and ‘Article 9 funds’ (which have the objective of making sustainable investments).

Although SFDR was intended to establish a disclosure regime, market practice has led to Article 8 and 9 funds, instead, becoming ‘quality labels’ for sustainability, consequently posing greenwashing and mis-selling risks.

(i) ESA’s Opinion

In June 2024, the ESAs published a joint Opinion in 2024, ‘On the assessment of the SFDR’ (the Opinion).

The Opinion was aimed primarily at assisting retail investors identify appropriate sustainable products and proposed (among other things) the introduction of a product classification system, based on regulatory categories and/or sustainability indicators which could help consumers navigate the broad selection of sustainable products and support the full transition to sustainable finance.

A Simmons summary of the joint Opinion can be found here.

(ii) European Parliament study

In July 2024, the European Parliament (EP) published a study, ‘The current Implementation of the Sustainability-related Financial Disclosures Regulation (SFDR)’ (the Study) recommending changes to the SFDR.

A Simmons summary of the Study can be found here.

The Study, commissioned by the EP's ECON committee, examines how well the SFDR is working, particularly for retail investors. Among its recommendations for change are:

• more recognisable product labels or categories;
• better interaction between SFDR and other disclosure rules;
• expanding the scope of Principle Adverse Impacts (PAI); and
• more supportive information infrastructure.

The Study accepts that product categories are useful but concludes that those based on Article 8 and Article 9 are too complex and unintuitive for investors for them to be used as categories.

Instead, it recommends establishing new categories, including "impact" products and "transition" products. Any categories, though, should be based on consumer testing to ensure that the categories work as intended.

A Simmons summary of the Study can be found here.

(iii) Report of the Platform on Sustainable Finance

In December 2024, the Platform on Sustainable Finance, an advisory body to the Commission established under the Taxonomy Regulation, published a Report, ‘Categorisation of Products under the SFDR’ (the Report).

The Report recommended the introduction of three product categories:

- Sustainable

Sustainable products would contribute through taxonomy aligned investments or sustainable investments with no significant harmful activities or assets based on a more concise definition consistent with the taxonomy.

- Transition

This category would include investments or portfolios which support the transition to net zero and a sustainable economy, while avoiding carbon lock ins, in accordance with the Commission's June 2023 recommendations on facilitating financing for the transition to a sustainable economy.

- ESG collection

A product in the ESG category would exclude significantly harmful investments / activities and invest in assets with better environmental and/or social criteria or applying various sustainability features.

A financial product which does not fall within one of the above categories would be identified as ‘unclassified’.

A Simmons summary of the Report can be found here

---

(b) Level 2

i) RTS on Disclosure obligations

The ESAs developed Level 2 measures under SFDR under two workstreams, covering

• the content and format of what FMPs must disclose under the SFDR and
• taxonomy related sustainability disclosures.

The Level 2 RTS were published in the Official Journal on 25 July 2022 and took effect on 1 January 2023.

In December 20222, a first corrigendum was published in the OJ, to include some omitted crosses in the 'Yes' or 'No' box at the start of Annexes III, IV and V.

As the corrigendum failed to include the '1288' in the title of the Delegated Regulation, a second corrigendum was published in January 2023 to correct this.

Finally, Delegated Regulation (EU) 2023/363, published on 17 Feb 2023, then corrected two typos at (i) Article 55(1)(b)(iv) and (ii) Article 62(1)(b)(iv).

The consolidated version of the RTS as they currently stand can be found here

(ii) Fossil gas and nuclear activities

The Commission Delegated Regulation made under the Taxonomy Regulation covering fossil gas and nuclear activities was published on 15 July 2022 and came into effect on 1 January 2023.

This required consequential changes to be made to the SFDR Level 2 RTS, and the ESAs submitted draft arrangements to the Commission in a Final Report on 30 September 2022. Following adoption of these, a Delegated Regulation was published in the Official Journal on 17 February 2023 and took effect on 20 February 2023.

Ongoing work on Level 2 measures

(i) Principal Adverse Impact (PAI) indicators

By letters dated 8 April 2022 and 11 April 2022 (the second of which was not received until 28 April), the Commission mandated the ESAs to review the PAI indicators and financial product disclosures required by the SFDR and to produce proposed amendments for (i) extending the list of social indicators for PAIs, (ii) refining the content of a number of the other PAI indicators and their respective definitions, applicable methodologies, metrics and presentation and (iii) introducing new financial product disclosure of greenhouse gas (GHG) emission reduction targets.

On 4 December 2023, the ESAs published a Final Report containing draft RTS. These go beyond the topics contained in the Commission’s mandate and deal, in addition, with enhanced disclosure of how sustainable investments comply with the do not significantly harm (DNSH) principle simplification of the templates contained in Annexes II to V of the SFDR Delegated Regulation (including include a new dashboard with a simple summary of key information) revision of the provisions for products with investment options such as multi-option products (MOPs) and other technical adjustments, including harmonised calculation of sustainable investments and a requirement to produce the disclosures in machine-readable format.

(ii) Deprioritisation of certain Level 2 measures

By its letter of 1 October 2025, the Commission informed the heads of the ESAs that it intended to deprioritised a number of non-essential empowerments to adopt Level 2 measures made under various Level 1 directives and regulations. This means that the Commission will not adopt measures under these empowerments until at least 1 October 2027.

The affected measures are set out in the annex to the Commission’s letter and include the following revised RTS to be made under the SFDR concerning the transparency of:

• the sustainability indicators in relation to adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters at entity level SFDR - Art. 4(7)
• the promotion of environmental or social characteristics and of sustainable investments on website SFDR - Art. 10(2)
• the promotion of environmental or social characteristics and of sustainable investments in periodic reports - Art.11(4)
• sustainable investment for financial products having sustainable investment as their objective - Art. 9(5)
• investment in environmentally sustainable economic activities (EU Taxonomy) for financial products promoting environmental characteristics - Art. 8(4)
• investment in environmentally sustainable economic activities (EU Taxonomy) for financial products having sustainable investment as their objective (June 2021 and June 2022, depending on the taxonomy objectives) - Art. 9(6)
• environmental or social characteristics for financial products promoting such characteristics - Art. 8(3)
• the principle of do no significant harm - Art. 2a(3)
• the sustainability indicators in relation to adverse impacts on the climate and other environmental related at entity level - Art. 4(6)
• investment in environmentally sustainable economic activities (EU Taxonomy) in periodic reports – Art 11(5)

(c) Interpretation and guidance

(i) Consolidated Q&As

As a number of aspects of the SFDR regime have proved difficult to interpret, an array of Q&As have been published by the Commission and the ESAs since the SFDR’s inception.

For ease of reference, on 12 January 2024, ESMA published an update to its May 2023 document which consolidates its and the Commission’s Q&As into a single resource.

The consolidated document pulls together the following:

• the Commission's Q&As of 6 April 2023, made public on 14 April 2023.
  These responded to the ESAs' questions of 9 September 2022.
• the Commission's Q&As of 17 May 2022.
  These responded to the ESAs questions of 10 December 2021. The answer to Q9 was amended by the Commission's Annex of 6 April 2023, made public on 14 April 2023.
• the Commission's Q&As of 14 July 2021, made public on 26 July 2021
  These responded to the ESAs' questions of 7 January 2021.
  A corrigendum dated 23 November 2021, corrected the order of Q's 1 and 2, while the answer to Q4 was amended the Commission's Annex of 6 April 2023, made public on 14 April 2023 and
• the ESAs' Q&As of 17 November 2022, on the SFDR Level 2 RTS.

(ii) ESA's clarifications

The consolidated Q&A does not include the European Supervisory Authorities’ (ESAs) clarifications on key areas of the draft RTS under SFDR, published on 2 June 2022.

(iii) Commission Notice

In addition, on 15 June 2023, the Commission published a Notice (the Notice) as part of its ESG package. The Notice deals with “the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and links to the Sustainable Finance Disclosure Regulation.” See our article on the Notice for more information.

Finally, we have a number of client notes that summarise the various sets of Q&As and review their key impacts on asset managers:

• Simmons & Simmons client note on the Commission's Q&As made public on 14 April 2023
• Simmons & Simmons client note on the Commission Q&As of 17 May 2022
• Simmons & Simmons client note on the Commission Q&As made public on 26 July 2021
• Simmons & Simmons client note on the ESAs' Q&As of 17 November 2022

Our resources to help you

For our client notes on ESG matters for asset managers, see here.