The proposed changes to SFDR introduce four product categories, shifting away from the well-known Article 6, 8, and 9 classifications. This new approach reflects an effort to better distinguish investment strategies and improve transparency across sustainable finance markets.
The proposed SFDR categories
- Sustainable
Investments that contribute to sustainability through taxonomy-aligned activities or sustainable investments with no significant harmful activities. - Transition
Investments or portfolios that support the transition to net zero and the development of a sustainable economy. - ESG collection
Funds that exclude significantly harmful investments while focusing on assets with better environmental and social criteria. - Unclassified products
All other investment products that do not meet the criteria for the above three categories.
The introduction of these categories aims to provide investors with clearer distinctions between sustainable investment approaches, ensuring greater consistency in disclosure practices.
Short-term uncertainty, long-term benefits
A regulatory change of this scale will inevitably create confusion in the short term. Investors and asset managers have structured portfolios based on the existing SFDR classifications, and adjusting to the new categories will require time and effort. Key concerns include:
- Reclassification of existing funds – Investors will need to reassess whether their funds fit within the new framework.
- Market perception and comparability – Fund managers must navigate shifting investor expectations and ensure consistency in messaging.
- Regulatory burden – Asset managers will have to revise disclosures and adapt reporting processes to comply with the new requirements.
However, in the medium to long term, the new framework will create greater alignment with the UK’s SDR and potentially influence global regulatory trends. By standardising sustainability classifications, the European Commission aims to enhance comparability, reduce greenwashing risks, and increase investor confidence.
Key developments to watch
The European Commission is expected to finalise its proposal to reform the SFDR framework by the end of Q2 2025. As this process unfolds, several factors will shape the implementation and market response:
- Fund flows – The level of inflows and outflows into sustainable funds will indicate how investors react to the new categories.
- Regulatory adjustments – Feedback from the financial sector may lead to refinements in the final regulation.
- EU political landscape – Political shifts could influence the pace and direction of regulatory reform.
How can we help?
Navigating regulatory change requires a forward-looking strategy that ensures compliance while maintaining investment integrity. Our regulatory team provides expert guidance on adapting to SFDR reform, offering tailored solutions to meet evolving disclosure requirements.
For asset managers, preparing early is key. Understanding the new product classifications, assessing fund positioning, and enhancing reporting frameworks will be essential to remaining competitive in a rapidly evolving regulatory landscape.
As SFDR reform progresses, we will continue to monitor key developments, market responses, and investor sentiment, ensuring our clients are well-positioned to navigate this transition.
Final thoughts
The shift to a new SFDR framework may bring initial uncertainty and operational challenges, but ultimately, it represents a step towards greater global alignment in sustainable finance. By harmonising regulations and increasing transparency, the European Commission aims to build investor trust and facilitate more meaningful sustainable investments.
For businesses and asset managers, the key to success lies in proactive adaptation and strategic planning. The coming months will be crucial in shaping the future of SFDR—and the sustainable finance industry.
