In an effort to streamline Europe’s transparency regulations for financial instruments with social or environmental goals, the European Commission recently proposed major changes to the Sustainable Finance Disclosure Regulation.

A news release claims that the modifications will simplify things and give investors better information. Additionally, they want to increase retail involvement in EU capital markets and reduce regulatory costs for financial firms. According to the statement, the present SFDR disclosures are excessively lengthy and complex, according to a commission examination. Comparing products is a challenge for many investors. Furthermore, the rules became a de facto labelling mechanism. This change raised the possibility of greenwashing and perplexed individual investors.

Consequently, the framework failed to achieve its objective of directing investments towards Europe’s sustainability priorities. The commission is currently working to change that pattern. It seeks disclosures that are concise, understandable, and in line with consumer demands. The plan eliminates financial market participants’ entity-level disclosure obligations. High compliance expenses resulted from these duties’ overlap with the Corporate Sustainability Reporting Directive. Environmental and social consequences would still only need to be reported by the biggest companies under the revised CSRD thresholds.

Disclosures at the product level will likewise get shorter. The commission seeks accessible, comparative, and practical information. Clearer instructions on how to showcase sustainable qualities will be given to providers, assisting investors in making prompt, well-informed decisions. A straightforward three-tier structure for financial products making ESG claims is introduced in the draft. It shows widespread agreement among stakeholders. They fall into three categories: “sustainable”, “transition”, and “ESG basics”.

At least 70% of a product’s portfolio must be devoted to its strategy. Additionally, they must keep out dangerous industries like tobacco, illegal weapons, and fossil fuels above a particular threshold.

The use of ESG claims in names and marketing materials is limited to items in these categories. According to the commission, taking this action will boost confidence and lessen greenwashing. Technical provisions were added to the SFDR after it went into effect in 2021, and they became effective in 2023. The framework is redesigned in the new proposal, which also establishes the fundamental characteristics of the supervisory system and categories.

A small collection of implementing regulations with more technical specifics will be created by the commission. The plan will now be examined by the council and parliament.