The European Parliament may push for tougher disclosure and investment requirements for sustainability-linked financial products under a new draft report on the review of the Sustainable Finance Disclosure Regulation. The report, filed by Rapporteur MEP Gerben-Jan Gerbrandy, sets out Parliament's proposed negotiating position on the European Commission's planned overhaul of the SFDR framework. The draft signals a shift toward stricter labelling discipline as European policymakers respond to persistent greenwashing concerns in the asset management industry.

 

Background to the SFDR Review

 

The Sustainable Finance Disclosure Regulation has been in application since 2021 and sets out how financial market participants such as asset managers must communicate sustainability information to investors. The framework covers integration of sustainability risks, consideration of adverse sustainability impacts and the provision of sustainability-related information at the financial product level. Its underlying objectives included channelling private capital toward the sustainability transition and helping companies pursue transition-related commercial opportunities.

A 2023 review by the Commission found that disclosures under the regulation had become too long and complex, making it difficult for investors to compare the environmental or social characteristics of financial products. The review also identified that the Article 8 and Article 9 disclosure regimes were being used in practice as de facto sustainability labels, which risked misleading investors into assuming Article 9 funds were fully sustainable and Article 8 funds strongly integrated ESG factors. The Commission concluded that this dynamic was increasing exposure to greenwashing across the European retail investment market.

 

The Commission's Proposed Three-Category System

 

To address these issues, the Commission has proposed a simplified categorisation system for financial products making ESG claims, organised around three labels. The Sustainable category would apply to products contributing to sustainability goals such as climate, environment or social objectives, where holdings already meet high sustainability standards. The Transition category would cover products investing in companies and projects that are not yet sustainable but are on a credible transition path or contributing to improvements in environmental or social areas.

The third category, ESG Basics, would apply to products that do not meet the Sustainable or Transition criteria but still integrate ESG investment approaches, including best-in-class strategies focused on top performers on a given ESG metric or strategies that exclude the worst ESG performers. The structure is designed to give retail investors a clearer view of what each product actually delivers in sustainability terms. By embedding the categorisation in regulation, the Commission aims to replace ad hoc labelling practices with a consistent EU-wide framework.

 

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Parliament's Proposed Amendments

 

The draft report describes the Commission's proposal as an excellent starting point but proposes a series of amendments aimed at deepening transparency and investor protection. The most significant addition is the introduction of a set of mandatory Principal Adverse Indicator disclosures for products using any of the new categories, allowing investors to compare products within each label on a like-for-like basis. The report also proposes mandatory reporting, on a comply-or-explain basis, describing the engagement strategy pursued by the financial market participant and how it has been implemented in alignment with each product's objectives.

For products that are not categorised under the new system but still refer to sustainability factors in their marketing or documentation, the rapporteur proposes a disclaimer requirement to inform retail investors that the product does not meet EU standards for defining sustainable financial products. This addition is designed to close a potential loophole in which products avoid the categorisation regime while still benefiting from sustainability-linked branding. Together, the proposed measures would tighten the link between marketing language, disclosure depth and underlying portfolio composition.

 

The 20 Percent Exclusion Rule for ESG Basics

 

A particularly notable element of the draft report is a new requirement for products under the ESG Basics category to eliminate at least 20 percent of the lowest sustainability-rated securities relative to their investment universe or benchmark. This exclusion threshold establishes a quantitative floor for what qualifies as a credible ESG Basics product, replacing the current reliance on broad strategy descriptions. By introducing a specific minimum threshold, Parliament aims to prevent the lowest tier of the new label from being used as a branding mechanism without meaningful portfolio implications.

The proposal also reflects a broader policy view that ESG integration should produce observable differences in fund composition rather than functioning as a marketing layer over conventional strategies. If adopted, the rule would force a number of currently labelled products to either tighten their exclusion frameworks or move to a different category. The change would have direct implications for index providers, model portfolio managers and asset managers running large pools of ESG-labelled passive capital.

 

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Implications for Asset Managers and Investors

 

For asset managers, the proposed amendments would increase compliance complexity in the short term, particularly for firms that currently rely on Article 8 disclosures as a de facto sustainability label. Firms would need to map their existing product ranges against the new three-category system, redesign disclosures around mandatory PAI indicators and document their engagement strategies in greater depth. The comply-or-explain element provides some flexibility but raises the reputational cost of opting out of disclosure on engagement.

For retail and institutional investors, the proposals are intended to deliver clearer, more comparable information across products that make sustainability claims. If adopted in their current form, the rules would make it more difficult for products to use sustainability-linked language without underlying portfolio commitments to support those claims. Over time, this should narrow the gap between marketed sustainability profile and actual portfolio behaviour, which is the central concern driving the SFDR review.

 

Outlook for the SFDR Reform

 

The draft report will be presented to Parliament's Economic and Monetary Affairs Committee in June, with a vote on the proposals scheduled for mid-July. The outcome will shape Parliament's negotiating position in subsequent discussions with the Commission and the Council on the final shape of the SFDR overhaul. Asset managers and product providers across the European Union are likely to watch the July vote closely, given the operational implications of mandatory PAI disclosures, engagement reporting and the proposed exclusion threshold.

The broader trajectory of the SFDR review reflects a maturing European approach to sustainable finance regulation, where transparency requirements are being progressively tightened in response to evolving market practice. How the final framework balances investor protection with compliance burden will determine its long-term effectiveness. A well-calibrated outcome could materially strengthen the credibility of EU-labelled sustainable funds and reinforce the bloc's leadership in sustainable finance regulation.