The long-awaited SFDR 2.0
02 December 2025The European Commission (Commission) has finally unveiled their proposals to overhaul the EU’s Sustainable Finance Disclosure Regulation (SFDR) — often dubbed “SFDR 2.0”.
SFDR 1.0 has fundamentally reshaped the ESG landscape for private capital managers since it came into force in 2021. Limited partners across Europe have increasingly signaled their expectations for managers to launch Article 8 and in some cases Article 9 products. Morningstar report that in the third quarter of 2025, newly launched Article 8 and Article 9 funds accounted for close to 49% of all funds launched in the EU[1]. From a Private Capital perspective, Invest Europe report that, of funds subject to SFDR, 84% of 2023 vintage funds are classified as Article 8 or 9[2].
With SFDR 2.0 on the horizon, investors are beginning to speak to managers about the new product categories and will start to set expectations for the classification of future vintages. Now is a good time to review the product categories and benchmark current ESG strategies against investor expectations.
Why are the amendments necessary?
In surprisingly candid words, the EC state that SFDR has too often produced lengthy, complex disclosures that are hard to compare and has been used as a de facto labelling system, fueling confusion for investors and increasing greenwashing and mis‑selling risks. The proposed reforms aim to streamline disclosures, reduce costs, and better align the regime with market practice and investor needs, with the new framework focusing on decision‑useful, comparable information that supports capital flows to sustainable and transitioning activities. The EC state that the changes to SFDR reflect the ESG Omnibus simplification package and seek to eliminate any duplication with the Corporate Sustainability Reporting Directive (CSRD).
What are the proposed changes in summary?
The draft text proposes the following key amendments:
- Change in scope: removing banks and MiFID investment firms (including financial advisers and delegate portfolio managers) from the scope of SFDR (though these are likely to still be impacted by the rules, albeit indirectly).
- Reduced entity-level disclosures: removing the requirements for firms to provide entity-level reporting for principal adverse impacts on sustainability factors (PAIs) and remuneration policy disclosures.
- Significant reduction in product-level disclosures: This includes repealing the regulatory technical standards accompanying SFDR (which prescribe cumbersome disclosure and reporting templates for products disclosing under current articles 8 or 9 SFDR) and removing mandatory taxonomy-alignment reporting.
- Product categories: Introducing three criteria-based categories for products making ESG claims.
- Deleting concepts: Removing the concept of sustainable investment and do not significantly harm.
What are the new product categories?
Despite its use in the market as a labelling regime, SFDR 1.0 is a disclosure regime. Recognising this use in practice, the EC is introducing what it refers to as “an ESG product categorisation system”, with explicit criteria for each sustainability-related product. The table below lists the proposed categories, their accompanying criteria and some of the example types of products provided in the text. These new categories will replace the existing articles 8 and 9.
| Category | Description | Criteria (summary) | Example (non-exhaustive summary list) |
| Transition (Article 7) | Products that invest in the transition of undertakings, economic activities, or other assets towards sustainability, or contribute to such transition. |
Deemed compliance for products that replicate or are managed by reference to an EU CTB or PAB. Compliance with a) is also deemed for products that have at least 15% of taxonomy aligned investments. |
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| ESG basics (Article 8) | Products that integrate sustainability factors in their investment strategy beyond the consideration of sustainability risks |
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Sustainable (Article 9) | Products investing in sustainable undertakings or economic activities or other sustainable assets, or contribute to sustainability |
Deemed compliance for products that replicate or are managed by reference to a PAB. Compliance with a) is also deemed for products that have at least 15% of taxonomy aligned investments. |
|
Combination (Article 9a) | Products that combine financial products categorised as sustainability-related products |
| No explicit examples provided. In practice, should capture fund-of-funds where at least 70% of underlying funds are categorised as sustainability-related products. |
Impact (Article 7 or 9 together with article 2(26)) | Transition (art. 7) or sustainable (art. 9) products with an objective of making a pre-defined positive measurable environmental or social impact. |
| No explicit examples provided. In practice, should capture article 7 or 9 products with an explicit impact objective operating in accordance with a theory of change. |
What disclosures will be required for products in scope of SFDR?
All products (mandatory disclosure): All products in scope of SFDR will still need to include in their pre-contractual disclosures (PCD), information relating to the integration of sustainability risks.
Non-categorised products (voluntary disclosures): New article 6a gives the option for firms to provide information on whether and how the product considers sustainability factors in the PCD, provided that such information is not a central element of the PCD, is not included in the KIID and does not constitute claims within the meaning of articles 7, 8 or 9. If firms opt-in to these disclosures in the PCD, they will also need to describe in the product’s annual report how sustainability factors were considered.
Categorised products (mandatory disclosures): All categorised products will need to comply with the prescribed disclosure requirements set out in SFDR 2.0 (i.e. no longer needing to rely on RTS template disclosures). This includes a statement that the product meets the relevant conditions for relevant category, a description if the investment strategy and the sustainability-related indicator(s) used to measure compliance with the strategy and achievement of the product’s objective, and information on data sources.
Is there any grandfathering?
Yes. Managers of closed-ended products which closed prior to the application date of SFDR 2.0 can choose not to apply the new rules in SFDR 2.0 to those products. The text suggests that, for these products, situation, managers could choose not to apply SFDR in its entirety to rather than continue to comply with the SFDR 1.0 rules. However, managers will need to consider whether existing contractual arrangements nevertheless require compliance with SFDR 1.0 to continue.
When will SFDR 2.0 come into force?
The European Parliament and European Council will now review and negotiate the SFDR 2.0 text with the European Commission. It is possible that substantial changes will be made to the current draft. It is not clear when SFDR 2.0 will come into force, though the EC state that the implementation and start up period will occur from 2027 to 2028.
What should managers do now to prepare for SFDR 2.0?
Investors may begin asking managers about the new product categories and the implications of SFDR 2.0 more widely. As such, managers may consider it prudent to benchmark their existing products against the new product categories and disclosure requirements to determine the extent of alignment and potential changes required to comply with SFDR 2.0, assuming (for closed-ended products that are no longer being distributed) they will be opting-in to the SFDR 2.0 regime.
However, the text could change substantially before it is formally adopted into law. Therefore, it is wise not to make too many assumptions at this stage and it seems reasonably to limit any exercise in considering SFDR 2.0 implementation to that which is necessarily required to assist with investor conversations.
We would encourage feeding comments into relevant industry body working groups for them to take forward into discussion.
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