SFDR 2.0: What you need to know

On 20 November 2025, the European Commission adopted its final proposal for a set of amendments to overhaul the Sustainable Finance Disclosure Regulation (“SFDR 2.0”). The proposals aim to address the shortcomings in the current legislative act by simplifying the rules and align disclosure with other EU sustainability frameworks, thereby increasing efficiency and cut reporting costs for firms. Whilst timing remains uncertain, as it still needs to pass through the EU’s legislative process, it is expected that the earliest effective date is likely to be around early to mid-2028.

Key changes

• Creating a new product categorisation regime for financial products making ESG claims, to replace the existing Article 8 and Article 9 disclosure regime. Strict eligibility criteria are proposed for each of the three new categories: ‘sustainable’, ‘transition’ and ‘ESG basics’ to address the concerns EU regulators had with the current disclosure regime being used as a product categorisation / labelling regime (because of which most products can easily claim Article 8 alignment under current rules).

• Imposing very strict limitations regarding ESG marketing and disclosures for uncategorised products – who will only be able to mention how they consider ESG factors in their pre-contractual disclosures and periodic reports (subject to strict prominence guardrails) and not in any marketing materials. 

• Removing portfolio management and investment advice from the scope of SFDR altogether.

• Removing the definition of ‘sustainable investments,’ along with the “do no significant harm” principle and “good governance” requirements as these principles are now intended to be captured through the mandatory exclusions and other qualifying criteria applicable to each ESG product category.

• Removing the entity level requirements for PAI reporting and disclosures on how sustainability risks are considered in remuneration policies.

• Streamlining the disclosure and reporting obligations – detailed website disclosures will no longer be required, and the pre-contractual / periodic reports will have a 2-page limit. However, clients and investors will be able to request more information upon request – which could prove to be practically burdensome, as different clients could pose different requests. 

• Mandatory Taxonomy-related disclosures will only be required for Article 7 and 9 products pursuing an environmental objective.

There are also some significant differences in the final version compared to the leaked version published on 6 November, most notably:

• No exemption for AIFs marketed exclusively to professional investors, which the Commission had initially proposed in the leaked draft;

• Mandatory PAI product level reporting and Taxonomy reporting has been reintroduced for Article 7 and 9 products (which had been deleted in the leaked version); 

• Additional mandatory exclusions have been applied to the Article 7 and 8 categories; 

• The strict limitations on uncategorised products’ ability to make ESG claims, has been amended to only apply to consideration of sustainability factors, and not to the consideration of sustainability risks; and

• An 18-month implementation from publication of the final rules has been proposed.

Read on for further detail.

New ESG product categorisation framework replacing existing disclosures regime

The draft Regulation removes current Article 8 (that applies to products that claim to promote environmental and social characteristics) and Article 9 (that applies to products that have sustainable investment as their objective) and replaces them with new product categorisation rules. This move from a disclosure regime to a product categorisation regime is similar to the FCA’s Sustainability Disclosure Regime (SDR) labelling regime, although the draft SFDR 2.0 clearly refers to these as product categories rather than labels. Each category will have mandatory criteria in line with ESMA’s guidelines on fund names

As a result, the universe of SFDR 2.0 products will be as follows:

In order to qualify for one of the three ESG categories, products must: 

1. have at least 70% of the portfolio aligned with the ESG objective of transition/sustainability or (in the case of Article 8 products) with the strategy to integrate sustainability factors. This is helpfully lower than the 80% threshold in the ESMA fund naming guidelines but aligned with the FCA’s 70% threshold for labelled products. Interestingly, the draft also suggests that the 70% requirement can be met for the sustainability and transition categories if the portfolio is 15% Taxonomy-aligned (and the EU authorities have the power to review and increase this 15% figure after 3 years); 

2. comply with the Paris Aligned Benchmark (PAB) exclusions on a mandatory basis (mirroring the approach in the ESMA fund naming guidelines) and additional exclusions regarding the fossil fuels value chain – the exact exclusions that apply, vary depending on the product category, with the most exclusions applicable to Article 9 products and the least exclusions applicable to Article 8 products; and

3. meet other eligibility and disclosure requirements – including product design / strategy requirements, pre-contractual disclosures and periodic reporting. 

Although this is deferred to the Level 2, the draft suggests there may be some flexibility for hedging instruments (i.e. to not be subject to the mandatory exclusions) and a phase-in period to meet the 70% threshold – which would be a helpful change from the EU authorities’ previous stance on these points. 

Risk of breaching the regime through ESG claims

By way of recap, the current SFDR product rules are triggered based on the ESG claims made in respect of a product – e.g., Article 8 is triggered today, where a product claims to promote environmental or social characteristics. Although SFDR 2.0 is moving to a product categorisation regime, the claims related trigger of the current SFDR rules, is still being maintained. 

This is because, under the draft rules, only:

• Products in the “transition” category can “claim that their financial products invest in the transition of undertakings, economic activities, or other assets towards sustainability, or contribute to such transition”

• Products in the “sustainable” category can “claim that their financial products invest in sustainable undertakings, sustainable economic activities, or other sustainable assets, or contribute to sustainability”

• Products which fall in the “integrate sustainability factors” category (and the “transition” / “sustainable” categories) can “claim that their financial products, integrate sustainability factors in their investment strategy beyond risk management considerations”.

• Products in the “transition” or “sustainable” category and that “have as its objective the generation of a pre-defined, positive and measurable social or environmental impact”, can use the word “impact” in its name.

Uncategorised products – can say very little on ESG and not in any marketing materials

Under SFDR 2.0, an uncategorised product will be able to say very little on ESG – in fact (and the rules borrow from the French AMF’s doctrine here) the rules go on to state that uncategorised products:

• cannot disclose information on how they consider sustainability risks or factors in the name, KIID or marketing materials of the product – but only in the product’s pre-contractual disclosures and then in periodic reports on how those sustainability risks or factors were considered (and we expect that the restriction for marketing materials will be very impactful in practice); and 

• disclosures on the consideration of sustainability risks / factors must also not be a central element of precontractual disclosures (i.e. they must be secondary to the presentation of the product characteristics both in terms of breadth and positioning in the document, neutral, and limited to less than 10% of the volume occupied by the presentation of the financial product’s investment strategy).

New rules on data and estimates 

Recognising that there will continue to be data gaps in relation to sustainability data from investees, SFDR 2.0 aims to formalise and improve transparency about the use of estimates by market participants. In particular, it requires market participants to keep formalised and documented arrangements with data providers (where used) and formalised and documented methodologies of any internal estimates. Additionally, further information on data / estimates sourced from data providers, must be provided to clients and investors upon request. 

Other key changes:

The final draft introduces several other simplifications to the regime, including:

• Removal of portfolio management and investment advice from scope: Financial advisers and investment firms providing investment advice, and portfolio management services will be removed from scope. Portfolio managers that act as sub-advisers or delegate managers to in-scope SFDR firms, will still likely be indirectly impacted by the rules.

• Removal of the “sustainable investment” definition: This is a potentially helpful simplification measure and its replacement with mandatory ESG exclusions instead, should result in more standardisation across products – as the current “sustainable investment” test has been applied differently across the market, given FMPs have discretion to define “significant harm”. However, the application of mandatory exclusions could potentially be problematic, for products sold in international markets or where an international strategy is replicated within EU and non-EU funds or other investment products – given investor and jurisdictional push back on ESG exclusions in certain regions/markets.

• Streamlining of pre-contractual and periodic disclosures: The final text proposes a 2 page limit for each of these documents. However, clients and investors will be able to request more information upon request (e.g. regarding the sustainability features or criteria of the product, the data providers used and methodology for estimations) – which could prove to be practically burdensome, as different clients could pose different requests.

• Removal of separate product website disclosures: The current Article 10 requirement to publish detailed website disclosures has been replaced with a requirement to just publish the pre-contractual and website disclosures online (as per current rules).

• Removal of Taxonomy related disclosures: The mandatory Taxonomy alignment disclosures will only apply to Article 7 and Article 9 products with an environmental objective. Article 8 products will only have to disclose on Taxonomy alignment, if that is part of their ESG basics strategy.

• Removal of entity level PAI reporting and remuneration policies disclosure: The requirement for FMPs to disclose on their website, how their remuneration policies are consistent with the integration of sustainability risks has been removed. The removal of mandatory PAI reporting at an entity level is a very helpful change – given the compliance burden associated with the preparation of those reports, and the limited use / focus those reports appeared to have in the market. 

• Mandatory PAI product level reporting for Article 7/9 products: Transition and sustainable products now need to identify and disclose PAI indicators and explain actions taken to address those PAIs (whereas the leaked draft had deleted PAI reporting altogether). Helpfully, however, it appears that it is not necessary to use the indicators listed in Annex I of the SFDR RTS, and instead there is flexibility to use different indicators or provide a qualitative explanation of the impacts/actions, as relevant to the product (although there will be more detail on this requirement in the Level 2 delegated act).

Key differences from the leaked version

Whilst much of the framework of the published proposals remains the same as the leaked draft, there have been several important changes:

• The new professional opt-out exemption has been removed: Under the leaked draft, FMPs could choose not to comply with the regime for funds made available exclusively to professional investors. However, this new optional exemption has been deleted from the final draft, meaning funds sold to professional investors remain in scope.

• The criteria/requirements for the transition and sustainable categories have been made stricter:

  • Transition and sustainable products now need to identify and disclose PAI indicators and explain actions taken to address those PAIs (whereas, as noted above, the leaked draft had deleted PAI reporting altogether). 

  • As noted above, where a transition or sustainable product pursues an environmental objective, the product must disclose whether and to what extent its investments are EU Taxonomy-aligned (whereas the leaked version had deleted this obligation).

  • Additional mandatory exclusions have been added for transition products – notably, the exclusion relating to revenues derived from coal (i.e. limb (d) of the PAB exclusions), as well as the additional exclusions around development of new projects relating to coal, oil and gas and not having a plan to phase out from activities relating to coal for power generation.

  • It has been clarified that for investments underlying a transition product that aim towards transition to a climate change mitigation objective, the relevant plans/targets/strategies should be compatible with limiting global warming under the Paris Agreement and achieving climate neutrality under the EU Climate Law. This is potentially quite a high threshold. 

• More clarity has been provided on how products with “mixed” ESG goals should be treated: These will fall in the ESG basics category and must disclose the mix of ESG objectives from the other categories they promote - but are not then allowed to use ESG terms in the name of the product. The final draft also confirms that transition products can invest in some sustainable assets in addition to transition assets (so there is some limited ability “mix” in an Article 7 product). 

• Additional mandatory exclusion has been added to the ESG basics category: This is with respect to revenues derived from coal (i.e. limb (d) of the PAB exclusions).

• Uncategorised products (Article 6a) remain very limited to disclose consideration of sustainability factors or make sustainability-related claims: As noted previously, uncategorised products will be very limited in their ability to make ESG references or claims regarding consideration of sustainability factors (and will not be able to make references / claims in marketing materials, but only on a limited basis in pre-contractual documents). In the final draft, a new requirement has been introduced whereby if an uncategorised product discloses consideration of sustainability factors in its pre-contractual disclosures, they must now also include in their annual periodic disclosures a description of how they considered those sustainability factors. There is no detail on what this description should look like, although this disclosure is subject to the same restrictions as applies to uncategorised products’ pre-contractual disclosures (i.e. must not be a central element, so must be secondary both in terms of breadth and positioning, and must be neutral in tone).

• Clarification that uncategorised products are not restricted in their disclosures about how they consider sustainability risks (only how they consider sustainability factors): This is a welcome clarification, given that there is a continuing requirement for all products (including uncategorised products) to disclose the manner in which sustainability risks are integrated into investment decisions under Article 6.

Next steps

Timing

The final rules include an 18-month implementation period from when SFDR 2.0 comes into effect. The EU legislative process to agree SFDR 2.0 is likely to take around 12–18 months and the 18-month implementation period would then apply on top of that. This means the earliest effective date of SFDR 2.0 is likely to be around early to mid-2028 (at which point, the new regulation will immediately apply to AIFs and UCITS, whereas there is a 12-month transition period for other financial products).

Timing around the delegated acts is less clear. The Commission has indicated that it would like the delegated acts to come into effect at the same time as the Level 1 changes. If that is the case, then the 18 month implementation period proposed in the final Commission draft for compliance with the new rules will be key, as firms will need the final delegated acts before decisions can be made regarding the ability for products to meet the new Article 7, 8 and 9 categories and other SFDR 2.0 requirements that will be detailed in the delegated acts.

Grandfathering

There will be grandfathering of existing products, although there is some discrepancy in the draft as to whether the grandfathering will only apply to products that are closed to investors prior to the date of application of the amending regulation (per the recitals) or products which are closed-ended and which have simply been created and distributed before the date of application of the amending regulation (per the operative provisions).

The text of the proposal is available here.

The European Commission’s press release is available here.

Watch our webinar on the proposal here.