In November 2025, the European Commission published a much-awaited proposal to reform the Sustainable Finance Disclosure Regulation (SFDR). Its novelty lies in the introduction of a categorisation framework with exclusion rules and positive screening criteria for sustainability-themed financial products.
Standardising the marketing of products that use sustainability or ESG in their names is a step in the right direction. It should allow financial consumers to better navigate sustainability claims and protect them from greenwashing.
But what about social washing?
We are concerned that the proposed product classification framework fails “social” on two accounts: it doesn’t get the rules right for excluding companies on human rights grounds, and it leaves us in the dark about when financial products make a positive contribution to social sustainability.
If left unaddressed, these gaps will provide a green light for social washing – not as a bug, but as a design feature in SFDR 2.0.
Human rights-related exclusions
Investors are expected to exclude companies in “violation of the UN Global Compact or OECD Guidelines for Multinational Enterprises” from all sustainability-themed products.
On the surface, excluding companies that do not meet baseline standards of responsible conduct passes as a sensible approach. But the suggested formulation, imported from the Benchmarking Regulation, is beset by several layers of confusion that will undermine effective and consistent implementation.
The reference to the UN Global Compact, the world’s largest voluntary corporate sustainability platform, is misplaced. It is, in fact, the UN Guiding Principles on Business and Human Rights (UNGPs) that are interoperable with the OECD Guidelines for Multinational Enterprises and incorporated into related EU regulations, including the European Sustainability Reporting Standards (ESRS), the EU Taxonomy and the Corporate Sustainability Due Diligence Directive 9CSDDD).
Adding to the confusion, there is no consensus on what a violation of these standards entails.
The UNGPs and OECD Guidelines outline an iterative due diligence process through which companies seek to avoid and address negative impacts on people. A violation of these standards can refer to failures to demonstrate due diligence efforts or involvement with human rights abuses. Clarity on the interpretation envisioned by the regulator has implications for portfolio construction and risk management.
Excluding companies solely for not having due diligence policies and procedures in place, for example, runs the risk of leaving investors without viable, investible portfolios. Data on due diligence uptake by corporates has shown slow and uneven progress.
Exclusion based on occurrence of human rights harm better captures existing market practice. However, that interpretation warrants a more context-sensitive analysis.
Corporate human rights abuses are not rare, tail-end occurrences, but are widespread throughout the value chains underpinning the globalised economy. Against this backdrop, investors generally need to prioritise their efforts to address the most severe harms in their portfolios at any given time.
Moreover, investors can be a force for good when engaging with companies to address harms, rather than immediately cutting off financial ties. This tracks with the spirit of the UNGPs and OECD Guidelines, which expect financial institutions to use their leverage to bring about positive change in investees’ practices. Only when investees’ actions are not forthcoming or convincing should exclusion be considered.
We should be clear: a human rights-related exclusion criterion is important and necessary. But, as it is now, the criterion won’t deliver on its promise – it is out of sync with international standards and investor practice, and fraught with ambiguity.
Socially sustainable products
Sustainability-themed products in SFDR 2.0 are meant to capture positive contributions to both the environmental and social dimensions of sustainability. In practice, screening rules are heavily biased towards the former and non-existent for the latter.
For example, whereas SFDR 2.0 includes a definition of environmental objectives, there is no equivalent definition for social objectives.
This blind spot begs the question of what might count as legitimate claims for socially sustainable portfolios. Job creation? Producing drugs? Paying taxes? In the absence of any rules or direction, a flank is opened for social washing with the sky as the limit.
In fact, the contours of a limit can be elevated from pre-existing EU sustainability regulation and guidance. While the EU might not have in place a fully fledged social taxonomy, a proof of concept was presented by the Platform on Sustainable Finance.
Sticking with the examples above, the platform clarifies that the inherent benefits of economic activities such as job creation cannot be used to justify claims of positive contributions to social sustainability. But decent job creation and improving the accessibility and affordability of essential drugs can.
A course correction
The Council and Parliament are currently forming their positions on the Commission’s proposal before starting trilogue negotiations. A narrow window of opportunity to get the “social” dimension right in SFDR 2.0 is still open.
First, the exclusion criterion needs to reflect responsible business conduct standards and be restated in nuanced and unambiguous language.
For example, exclusion can be considered when investees are involved in severe human rights and humanitarian law abuses by factoring in the extent to which the investees’ due diligence efforts to address and remediate those abuses meet the requirements of the UNGPs and OECD Guidelines.
Second, social objectives should be defined to match the environmental equivalent. In the absence of a social taxonomy, the amended ESRS provides a framework for positive social impact reporting and can be used as a conceptual foundation.
Defining socially sustainable investments as those making a positive contribution to the rights of workers in the value chain, communities and consumers would offer direction while advancing regulatory interoperability.
Invoking the past – such as the political stalemate around a social taxonomy – to justify inaction in the present does not support effective and forward-looking policymaking.
In the SFDR context, such path dependencies risk reproducing the same wicked problem the regulation is meant to address: sustainability washing.
Signe Andreasen Lysgaard and Ioana Tuta are chief adviser and senior adviser on human rights, tech and business at the Danish Institute for Human Rights.
