The European Commission has announced a major crackdown on misleading financial labels, proposing that companies involved in fossil fuels be barred from marketing their investments as 'sustainable'. This landmark move, revealed on Thursday, November 20, 2025, directly addresses long-standing demands from environmental groups and financial experts across the globe.
A Stricter Framework to Curb Greenwashing
The proposal is a core part of the EU's plan to revise its Sustainable Finance Disclosure Regulation (SFDR), which was first introduced in 2021. The original regulation was designed to guide savers toward environmentally friendly investments, but was criticized by NGOs and experts in late September for being too vague and lenient. They insisted that, at a minimum, firms actively expanding their fossil fuel operations should be excluded from sustainable fund categories.
The European Commission's new plan acknowledges that the current system has the potential to mislead investors. To combat this, it introduces a stricter three-tier classification system for financial products, creating clearer boundaries to prevent greenwashing.
The New Three-Tier Sustainable Investment System
The proposed classification system is designed to bring unprecedented clarity to the market.
The first and most rigorous category, labelled 'sustainable', will automatically exclude any investments in companies that are active in fossil fuels or high-emitting energy activities, or are expanding their fossil fuel activities.
The second tier, named the 'transition' category, will also maintain a firm stance by barring companies that generate significant revenue from coal or are expanding their fossil fuel activities.
Finally, a third 'ESG basics' category—referring to environmental, social, and governance criteria—will still exclude firms earning a substantial portion of their income from coal. Importantly, all three categories will be required to factor in broader social and environmental impact criteria.
Next Steps and Broader Context
This proposal by the European Commission is not yet final. It still requires approval from EU member states and the European Parliament before it can become law. This initiative follows earlier action taken by the EU's markets watchdog, ESMA, which earlier this year required funds using 'sustainable' or 'ESG' in their names to exclude companies deriving more than 1% of revenue from coal or more than 10% from oil.
This collective action signals a powerful and coordinated effort by European regulators to ensure that the labels on financial products genuinely reflect their environmental impact, thereby empowering investors to make truly informed decisions.
