KEY INSIGHTS
SFDR review heralds major overhaul: The European Commission is contemplating significant reforms to the Sustainable Finance Disclosure Regulation after criticism of its design and identification of unintended consequences.
Mixed views highlight tension: As responses pour in from alternative asset managers and other stakeholders, there's an ongoing debate over whether the SFDR should evolve towards stricter categorisation, or retain its flexible disclosure-based approach.
Awaiting clear direction amid political flux: The future – and timing – of SFDR 2.0 remains uncertain as the Commission weighs input from a wide-ranging Call for Evidence, balancing the current political climate's focus on burden reduction with the ongoing push for decarbonisation and meaningful ESG integration.
A regular briefing for the alternative asset management industry.
When the European Commission passed the Sustainable Finance Disclosure Regulation – the SFDR – in 2019 it was against a different political backdrop. The new regulation, aiming to increase transparency and reduce greenwashing in the financial sector, was a cornerstone of the EU's plan for Europe to "shift to a net-zero economy".
But the SFDR was built on shaky foundations. The sequencing was criticised: disclosure obligations for the financial sector came ahead of those for the real economy. The final version of the law, which was quite different from that originally proposed by the Commission, was not subject to rigorous cost / benefit analysis, and was riddled with uncertainty. The burdens for the financial sector, including for alternative asset managers, were significant – whether or not the sponsor had a clear and explicit focus on "sustainable investment".
Many who were sympathetic to the Commission's policy objectives were critical of the actual rulebook. In fact, it quickly became apparent that the way that the differential disclosure obligations in Articles 6, 8 and 9 were being used by the market – as de facto labels – was actually adding to confusion, rather than resolving it, exacerbating greenwashing in some quarters.
So, in December 2022 – less than two years after the law became effective – the European Commission launched a review. The latest stage in that review, which is expected to lead to radical reform of SFDR, has just ended.
No doubt conscious of the very different political backdrop it now faces – burden reduction is more in vogue than ESG disclosure – the European Commission is certainly taking its time to publish revised proposals. It consulted widely during 2023 and reported on the results in May 2024, then launched a four-week Call for Evidence during May 2025.
Responses to that Call for Evidence, which ended last week, confirm that there is widespread agreement on the need for reform, but very mixed views about how radical the reform should be. Most responses from the alternative asset manager community continue to argue for a more focused and streamlined approach. The industry has made these arguments before – but is now pushing at a door that is wide open, rather than merely ajar.
Some reforms seem relatively uncontroversial. There is a broad consensus (laid out in AIMA's response) about the need to remove or significantly streamline disclosures that are seen as surplus to investor requirements – for example, disclosures at "entity-level", which give information about the asset manager and its entire portfolio. Many argue that these are not decision-useful for investors, who are mostly interested in data points for the specific funds they hold. Similarly, there has been a concerted push to reduce the reporting burden of the "principal adverse impact" (PAI) framework. Suggestions here include the introduction of a materiality qualifier, and a better match with corporate disclosure rules.
"Responses to that Call for Evidence confirm that there is widespread agreement on the need for reform, but very mixed views about how radical the reform should be."
However, there are also key areas where consensus is not apparent. For example, some industry responses (including Invest Europe) call for the SFDR to retain its character as a flexible disclosure-based framework. The view is that, while the SFDR is imperfect, a radical shift towards a stricter categorisation or labelling regime would be unduly restrictive, especially if applied to institutional-only funds. It could inhibit innovative and flexible investment strategies that would channel capital to sustainable investments, while continuing to raise capital from a global pool of investors. On the other hand, there are calls from other quarters – including from some industry associations that focus on sustainability – for a shift away from mere disclosures, towards a formal product categorisation or labelling regime.
For those firms that might be considering how to categorise their next fund, it remains hard to guess which way the Commission will go: will it follow earlier recommendations from influential groups like the Platform on Sustainable Finance (the Commission's own advisory group) and double down on the SFDR, albeit with some simplifying reforms that everyone can get behind? Or will it read the room and put forward a simpler set of proposals that focus principally on burden reduction – as it has done with the parallel but separate "sustainability omnibus" package?
At the moment, the Commission seems open to either option: it was telling that the Call for Evidence did not ask specific questions; it allowed respondents to put their views on the table.
The private markets have done a good job in spelling out what they want from the revised rules, and explaining the issues specific to alternative asset managers that are less worrisome for the public markets. It is not yet clear whether EU policymakers will take heed – although it does seem clear that we are still a long way from a finalised set of rules: although the timing is uncertain, it is unlikely that any reforms will be effective before 2028. And, as for the content, politics will inevitably play an important part in shaping their final form.
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