From complexity to confidence: Why SFDR II matters for investors now

The Sustainable Finance Disclosures Regulation (SFDR) was designed to improve transparency and help investors direct capital towards genuinely sustainable outcomes.

Four years on, the European Commission is in the middle of consulting on SFDR II, a substantial overhaul of the regime intended to simplify disclosures, reduce ambiguity and better align sustainability information with how investors actually make decisions.

That timing matters. A recent multi-institution study involving researchers from Stanford, Harvard Business School, the University of Amsterdam and London Business School offers timely, empirical insight into what has, and has not, worked under SFDR to date.

As policymakers gather feedback on the new framework, the lesson is clear: transparency only works if investors can use it.

What the evidence tells us

The study examined two core questions that sit at the heart of SFDR’s original ambition: whether sustainability classifications influenced investor behaviour, and whether they drove meaningful changes in fund portfolios.

In practice, the researchers found little evidence that Article 8 and Article 9 labels affected investor flows in a consistent or predictable way. Nor did they observe systematic portfolio shifts linked to reclassification decisions, even when some funds voluntarily moved from Article 9 to Article 8 following evolving market expectations.

Crucially, when the researchers tested a simplified, visual “traffic-light” style label, it had a significantly stronger impact on retail investor choice than existing SFDR disclosures. The conclusion was not that sustainability information is unimportant, but that its current form is too complex, inconsistent and technical to function as an effective decision tool.

This insight lands squarely in the middle of the SFDR II consultation and directly supports its stated objectives.

Why SFDR II is a necessary reset

The Commission’s proposals acknowledge many of the structural issues highlighted by both market participants and independent research.

Under SFDR II, the move away from Articles 8 and 9 towards a clearer categorisation system, Sustainable, Transition and ESG Basics, reflects a recognition that labels must communicate intent and outcomes more intuitively. Similarly, the proposed reduction and simplification of product-level disclosures signals a shift towards relevance and usability over volume.

The removal of the standalone “sustainable investment” definition and the greater reliance on exclusions and positive contribution criteria are also significant. These changes address long-standing challenges around inconsistent interpretation, data gaps and supervisory divergence, which have diluted the credibility and comparability of disclosures under the current regime.

SFDR II is not an abandonment of SFDR’s ambition, but a recalibration, informed by real-world evidence of how investors engage with sustainability information.

What to prioritise as feedback closes

For SFDR II to succeed, investor-centred categorisation will be critical. The introduction of three product categories represents a meaningful step forward, but their effectiveness will ultimately rest on clarity, consistency and careful naming. Categories need to help investors quickly understand what a product is designed to achieve, and, just as importantly, what it is not, without creating unintended assumptions about risk, complexity or suitability.

That clarity must be reinforced through more concise and standardised disclosures. Rather than adding new layers of documentation, sustainability information should be embedded where investors already look, including within existing PRIIPs documentation. A short, plain-language sustainability summary aligned to the relevant product category would make it far easier for investors to compare products and assess sustainability characteristics at the point of sale.

Simplification at the investor level, however, needs to be underpinned by stronger data foundations behind the scenes. Standardised, machine-readable disclosure templates and a central EU register would materially improve comparability, enable automated supervisory checks and create clearer audit trails, supporting both market discipline and effective oversight.

Finally, the technical architecture of the regime must be clearer and more consistently enforced. Streamlining the Principal Adverse Impact framework, clarifying positive contribution requirements and strengthening supervisory coordination will be essential to ensure the rules are applied consistently across markets. Visible and timely enforcement will remain a key factor in maintaining confidence in the regime and in the sustainability claims made under it.

Turning consultation into confidence

The direction set out in SFDR II is broadly welcomed by the market, not because it lowers ambition, but because it recognises that effective regulation must be operational, enforceable and intelligible to its end users.

The academic evidence is a useful reminder that complexity does not equal transparency. As the Commission moves from consultation to legislation, the opportunity is to anchor reform in what demonstrably works for investors, clear categories, concise information and data that can be trusted.

SFDR II represents a pivotal moment to move from good intentions to practical outcomes. Getting it right will determine whether sustainable finance disclosures finally deliver the confidence, credibility and capital allocation impact they were always meant to achieve.