November 2025

This post was automatically translated. Read the original post. (Ajankohtaiskatsaus: SFDR-uudistus)

Current Review: SFDR Reform

The European Commission is planning a significant reform of the SFDR regulation. Due to broad market demand, SFDR is transitioning from a mere disclosure obligation towards a clearer categorisation and classification system. For a product to receive a classification, at least 70% of its assets must meet the criteria of the chosen category.

New fund categories

The proposal would create three new fund categories:

  • Sustainable — funds that invest in companies that concretely promote sustainability or climate objectives.

  • Transition — funds that support companies in a credible transition towards low-carbon business (Article 7 funds).

  • ESG Basics — funds that take ESG factors into account but do not meet the requirements of the first two categories.

The Transition category excludes companies that are expanding their fossil fuel operations or do not have a credible plan for phasing out fossil fuel dependency.

According to Hortense Bioy, Head of Sustainable Investing at Morningstar, significant demand is likely to emerge particularly for the Sustainable category, as it resembles the current Article 8 category and many funds want to leverage the status of a sustainable fund.

Impact of the transition category

The new transition category is expected to have a broad impact on investment strategies. The exclusions related to fossil fuel operations proposed by the Commission aim to ensure that transition funds direct capital to companies with credible and measurable transition pathways.

Belonging to the transition category may require, for example, science-based emission reduction targets, investments in companies with growing green investments, following a Climate Transition Benchmark (CTB), or active ownership.

Easing of PAI requirements and taxonomy

Reporting on principal adverse impacts (PAI) will be significantly reduced. Going forward, reporting would only apply at the product level and only to Sustainable and Transition funds. Entity-level reporting would be eliminated entirely.

Indicators would be defined more flexibly than before, and fund managers could select them independently. The Commission would also remove mandatory EU Taxonomy-based reporting requirements, unless the taxonomy is part of the fund’s investment strategy.

Taxonomy alignment would, however, retain its significance: Article 7 and 9 funds may deviate from the 70% requirement if more than 15% of the investment targets’ activities are aligned with the EU Taxonomy.

Minimum exclusions and impact investing

The reformed system introduces minimum exclusions for Article 7 and 9 funds. Investments are not permitted in companies that derive revenue from controversial weapons, tobacco, or that have been found guilty of serious human rights violations.

An exception is made for use-of-proceeds bonds, provided that their proceeds are not directed to prohibited activities.

For the first time, the SFDR officially recognises impact investing. New impact sub-categories will be created under both Article 7 and Article 9, and qualifying for them requires a predefined, measurable positive impact as well as a credible engagement model.

Marketing rules and alternative funds

Products may no longer be marketed as sustainable without belonging to one of the three categories. Otherwise, they are classified as Article 6a funds, whose marketing may not reference sustainability in their names, prospectuses, or presentation materials.

However, limited information on sustainability risk management may be presented in the fund’s official documents.

Leaked drafts included a separate opt-out option for alternative funds, but this was not included in the final proposal. The decision is expected to increase lobbying pressure, as institutional investors consider the absence of the exemption a significant deterioration.

Next steps

The proposal will proceed to the European Parliament and the Council for deliberation. The ultimate impact will largely depend on how fund companies apply the new categories in practice.

Tracefi’s new sustainability reporting anticipates the change described above.

Best regards, Susanna Miekk-oja Managing Partner Tracefi