What the Final Proposal Means for Asset Managers Distributing Funds in Europe
The European Commission has published a proposal to reform SFDR, signaling a decisive transition away from a purely disclosure-based regime. Under the new draft, formal product categories are introduced, measurable entry criteria apply, and exclusions and sustainability objectives become the focal point. The goal remains the same: to help investors understand how sustainability is integrated, but the structure is materially changing.
A New Categorisation Framework
The proposal creates three principal product categories, or labels:
- Article 7 (Transition): products that explicitly pursue transition-oriented objectives, such as decarbonisation or a change in economic activities toward sustainability.
- Article 8 (Integration): products that integrate environmental or social factors into their investment decisions, even if they do not set out a dedicated sustainability objective.
- Article 9 (Sustainable objective): products that aim to contribute to environmental or social sustainable goals through clear, measurable outcomes.
To qualify for one of these labels, a product generally needs at least 70 percent of its assets aligned with the relevant category criteria. However, there is an exception for funds that invest more than 15 percent of their portfolio in economic activities aligned with the EU Taxonomy; this could help meet the 70 percent requirement.
Products that do not meet the criteria for any of these categories would be treated as unlabeled and would not be permitted to use sustainability-related naming or marketing.
Integration, Sustainable Objectives, and Impact
Under the proposal, Article 8 products include sustainability as a factor in decision-making (for example, ESG scoring, governance, or risk integration), but not necessarily as an investment objective. Article 9 products, however, are required to set a clear, measurable sustainability objective and to monitor progress using defined metrics.
Importantly, the European Commission clarifies that impact investing is formally recognised under the new regime. If a product under Article 7 or Article 9 claims to be “impact,” it must have a predefined impact strategy tied to a recognised change concept, and report on that impact in measurable terms.
Minimum Exclusions + Continued PAI Considerations
The reform links exclusion requirements directly to the product categories. Products using the Article 7, 8, or 9 label must apply a baseline set of exclusions. These include, in the Commission’s proposal, companies involved in activities such as controversial weapons, tobacco, or human-rights violations.
PAI (Principal Adverse Impact) reporting is set to undergo significant changes. Entity-level disclosure requirements and their corresponding templates have been eliminated, and product-level disclosure requirements have been greatly reduced. According to the Q&A, manufacturers will be able to select relevant PAI indicators against which they assess their performance, rather than using a mandated list for all. This may allow the focus to shift toward more material or strategy-specific adverse impacts rather than broad mandatory reporting.
Simplified and Shortened Product-Level Disclosures
The Commission emphasizes a significant reduction in product-level disclosure. According to the Q&A, the number of topics in disclosure templates will be reduced, and the remaining disclosures will use “clear, measurable, and usable concepts.” Information presented to investors is therefore expected to be shorter, more targeted, and better aligned with the new product categories. This simplification is designed to improve usability for investors and reduce the complexity burden for product manufacturers.
Taxonomy Disclosure Only When Relevant
The proposal further removes the requirement for all products to report taxonomy alignment unless taxonomy-aligned investments are part of the fund’s strategy. If a product does not rely on taxonomy-aligned activities, it is not obliged to disclose taxonomy alignment percentages.
PRIIPs KID May Also Change
The Commission proposes corresponding changes to the PRIIPs Regulation so that retail investors can more clearly understand the sustainability category of a PRIIP. A new section in the Key Information Document (KID) would indicate whether the product falls under Article 7, 8, or 9. This replaces the current, more generic disclosure about environmental or social objectives, helping retail investors better compare and understand sustainability-linked products.
What This Means for Asset Managers
For asset managers distributing funds in Europe, the proposed SFDR reform could reshape how sustainability is embedded in product design and investor communications. Rather than focusing primarily on reporting broad ESG risk and PAI tables, the emphasis may shift toward ensuring that products genuinely meet the quantitative and qualitative criteria of the chosen category.
Disclosures, including pre-contractual documents and periodic reports, are likely to become more streamlined, more aligned with these categories, and easier for end-investors to understand. At the same time, investment operations may need to evolve to ensure data systems track which assets count toward the 70 percent threshold, exclusion frameworks to enforce mandatory restrictions, and impact-measurement processes for products making impact claims must become more robust. While these changes may require modifications, further benefits are likely from the reduced overall reporting, especially for indicators not included in the investment objective.
The European ESG Template (EET) will also likely change. Since the EET is currently on version 1.1.3, the proposed reform could drive a new version (e.g., 1.2 or 2.0). Key fields that may be updated include product classification, exclusion flags, and selected PAI indicators.
At iQuant Solutions, we are monitoring these changes closely and analyzing their implications for asset managers and distributors in Europe. We look forward to guiding our clients through the transition to the new product categorisation framework, simplified disclosures, and updated reporting requirements. Reach out to us today to learn how we can help you prepare for and navigate these regulatory developments with clarity and innovative data management.
You may access the proposal here: https://ec.europa.eu/commission/presscorner/detail/en/ip_25_2736
