SFDR 2.0: EU Commission Proposes Overhaul of SFDR Regime

The European Commission has released a legislative proposal for the overhaul of the current Sustainable Finance Disclosure Regulation regime (SFDR 1.0), the EU’s disclosure framework for funds and other financial products integrating environmental and/or social aims.

The 20 November 2025 publication was preceded by a leaked draft which surfaced on 6 November, causing ripples of excitement amongst commentators. Inevitably, the leaked document proved an unreliable friend in certain respects given the ultimate differences between its content and the formal proposal, including in particular the exemption for professional investor–only funds contained in the leaked draft (which might make its way back during the trialogue legislative process). We refer to the proposal herein as SFDR 2.0.

Whatever its shortcomings, SFDR 1.0 was a groundbreaking piece of European sustainability legislation, reconfiguring the sustainability architecture for fund managers in particular, attracting close attention from institutional investors and heightening their expectations, and paving the way for the follow-up EU corporate reporting and due diligence frameworks and the UK Financial Conduct Authority’s (FCA’s) own labelling and sustainability disclosure requirements for funds (different from SFDR 1.0 in part due to lessons learned by the FCA from SFDR 1.0).

Turning full circle, it is clear the Commission drew materially on the FCA’s regime in formulating the proposal for SFDR 2.0, for example, the choice of a label for transition (“sustainability improvers” in FCA jargon), 70% as the minimum threshold for relevant investments, and requirement for impact products to disclose a “pre-set impact theory” (“theory of change” in FCA jargon).

Whilst SFDR 1.0 has only been in effect since March 2021, within less than three years the Commission was expressing concern that the disclosure regime was not being deployed as intended; in particular, the foundational disclosures required under current articles 8 and 9 were being used by the market as labels giving rise to the risk of greenwashing investors.

Further, the Commission identified problems of misalignment between various concepts and definitions in SFDR 1.0 and other EU sustainable finance legislation, challenges for fund managers and other financial market participants in need of reliable and comprehensive ESG data to meet transparency requirements, and concerns that disclosures were not sufficiently clear to help investors understand and compare various sustainability-related products.

KEY ELEMENTS OF THE PROPOSAL

The proposal introduces the following key changes to the existing SFDR 1.0 framework:

• The introduction of a new self-certifying categorisation or “labelling” system replacing the existing disclosure requirements under current articles 6, 8 and 9 of SFDR 1.0 (which became de facto categories or labels). The new system is built around three core categories: transition (new article 7), which backfills a policy gap for the better, ESG basics (new article 8), and sustainable (new article 9), collectively defined as sustainability-related financial products. These core categories will be supplemented by variants for combination products (new article 9a), impact editions of transition, and sustainability products which have as their objective the generation of a pre-defined, positive and measurable social or environmental impact. The combination category is effectively designed for funds-of-funds or similar products which invest in two or more financial products qualifying under new articles 7, 8 and 9. Accordingly, it differs materially from the FCA label for “sustainability mixed goals” funds, which allows for a blend of goals at both the investee company and fund levels.
• The requirement that only sustainability-related financial products (new articles 7, 8, 9 and impact/combination variants) may feature sustainability-related claims in their names and marketing communications, and only impact products may include “impact” in their name. Whilst other products (new article 6a) may not deploy ESG-related terms in their names or sustainability-related claims in marketing communications, they may include in the pre-contractual documents information on whether and how the product considers sustainability factors in such documents, provided this is not a central element and does not constitute claims within articles 7, 8 or 9. It will therefore be very difficult to use the “other” category for funds with even the vaguest sustainability aspiration, the result being that products with sustainability branding in their name or marketing materials will be obliged to meet the criteria for categories 7, 8 and 9. This contrasts with SFDR 1.0, under which current article 6 can credibly be made to work for products taking account of sustainability risks. This will be challenging when combined with the tightened scope of new article 8, which indicates some models for current article 8 funds (light green type) might not attain the level required for new article 8 funds.
• The removal of entity-level statements on the principal adverse impact (PAI) of investment decisions on sustainability factors. However, providers of new article 7 and 9 products will be required to identify and disclose the PAI of their investments on sustainability factors and explain any mitigating steps taken. In a welcome move, providers can comply in their own words; any PAI indicators produced by the Commission under new regulatory technical standards (RTS) will be voluntary.
• The removal of disclosure requirements regarding remuneration policies.
• The deletion of the concept of a “sustainable investment” under article 2(17) of SFDR 1.0, which is relevant to current article 8 (dark green type) and 9 funds, along with the consequential removal of the concepts of contribution to an environmental and social objective, Do No Significant Harm and good governance practices requirements for portfolio companies. However, as recital (8) of SFDR 2.0 makes clear, those three concepts are better deployed more simply in the criteria for the relevant new category.
• The streamlining of Taxonomy-alignment disclosures so that only new article 7 and 9 funds pursuing environmental objectives will be required to disclose the extent to which they invest in Taxonomy-aligned investments.
• The exclusion of investment firms and credit institutions that provide portfolio management from scope, leaving separately managed accounts and non-AIF funds-of-one out of scope, as are financial advisers.
• The repeal of SFDR 1.0 RTS; under SFDR 2.0 the Commission is empowered to adopt a much narrower set of RTS (noting that the proposal empowers the Commission, and not ESMA, to develop RTS unlike with SFDR 1.0).
• SFDR 2.0 being a maximum harmonisation regulation, which is intended to prevent individual EEA countries from gold-plating SFDR 2.0.

SUMMARY OF PROPOSED ELIGIBILITY CRITERIA FOR NEW ARTICLE 7, 8 AND 9 SFDR 2.0 FUNDS

The Commission is empowered to produce RTS to specify further PAI and sustainability indicators for voluntary use; limited permitted deviations from exclusions; methodologies for calculating the 70% threshold and phase-in periods; and conditions for permitted investment types to qualify for whichever sustainability-related category is claimed. Both ESG basics and sustainable financial products must “identify” (as opposed to “consider”) the principal adverse impacts of their investments on sustainability factors and explain any mitigating steps.

SIMPLER AND MORE SUCCINCT DISCLOSURES

Whilst the baseline mandatory disclosures include a statement that the product meets the conditions for the category, a description of the relevant strategy, and sustainability-related indicators used to measure adherence to the strategy and progress made, the detail will ultimately be governed by templates for categorised products to be created by the Commission in RTS.

The proposal makes clear that the disclosure and periodic reporting templates will be limited to two pages (with an additional one-page disclosure template for impact variants), a substantially shorter template limit than those under SFDR 1.0 RTS, which are up to six pages long.

Product-level website disclosures will merely require publication of the completed templates without any of the additional disclosures pursuant to current article 10 of SFDR 1.0 and SFDR 1.0. RTS. Entity-level disclosures are pared back to only disclosures of policies on integration of sustainability risks into investment decisions and likely impacts on returns (and even then on a comply-or-explain basis). Sustainability claims must be fair, clear, not misleading and consistent with SFDR 2.0 disclosures.

TRANSITIONAL PROVISIONS

There are no transitional provisions for current article 6, 8 or 9 “legacy” products under SFDR 1.0. The SFDR 1.0 regime will simply fall away; however, contractual arrangements driven by SFDR 1.0 compliance, including reporting, must continue in principle (or be brought to an end by agreement). Managers of closed-ended products that closed prior to the application date of SFDR 2.0 can choose not to apply SFDR 2.0.

IMPLEMENTATION TIMELINE

The proposal states that the new rules will take effect 18 months after the legislation comes into effect (during which the new RTS would likely be adopted). The precise timing will depend on the speed with which the European Council and Parliament negotiate and agree to the text through the trialogues. Broadly, the new rules will likely not apply before spring 2028.

NEXT STEPS

It is still early days: right now, the energy of asset managers is best directed at the lobbying process either directly or via industry associations and at monitoring how the text of the proposal evolves during the trialogues and the developing expectations of institutional investors. In parallel, managers may wish to begin high-level mapping of existing products against the proposed categories and to consider potential data or operational implications, pending further clarity. We will keep you updated on material developments.