SFDR 2.0: Proposal for amending regulation published

On 20 November 2025, the European Commission (the Commission) formally published its legislative proposal to amend the Sustainable Finance Disclosure Regulation (SFDR), the PRIIPs KID Regulation and repeal the SFDR Delegated Regulation (SFDR 2.0). The publication follows a leaked draft of the amendments in circulation earlier in November.

Upon implementation, SFDR established a disclosures framework for financial market participants (FMPs) regarding how they integrate and disclose environmental, social and governance (ESG) factors, which was further amended and supplemented by, inter alia, the Taxonomy Regulation and the SFDR Delegated Regulation. SFDR 2.0 represents a significant overhaul of the current framework and signals the evolution of SFDR into a product categorisation-based framework. In this advisory we will outline the key changes proposed by the Commission which are underpinned by two central themes: 

1. Simplification of and reduction in the sustainability-related administrative and disclosure requirements for FMPs and financial advisers and enhancing the coherence of the framework for FMP's operational needs; and 
   
   
2. Improvement of end-investors’ ability to understand and compare sustainability-linked financial products and protection against potentially misleading ESG claims.

Of particular note is the proposal that sustainability-related financial products will no longer be categorised as either Article 8 or Article 9 products as currently contemplated by the SFDR. Instead ESG product categories will be revised. The next table provides a comparison of the product-level disclosure requirements for the different categories of products under the proposed regime:  

Background 

Following its announcement that it would be carrying out a comprehensive assessment of SFDR in December 2022, the Commission carried out two consultations (one public and one targeted, together the Consultations) which ran from September - December 2023. The Consultations had the objectives of determining any shortcomings in how well SFDR was functioning in terms of increasing transparency, combatting greenwashing and ensuring that such information was disclosed to investors as well as attracting private funding to enable transition to increased sustainability and assisting EU companies to seize competitive opportunities. 

The summary report on the Consultations was published in May 2024 and while the responses showed significant support for the SFDR policy goals, there was mixed feedback on how effective the implementation of SFDR was at achieving its objectives. The report identified issues of misalignment between definitions and concepts in the SFDR and in the Taxonomy Regulation, the SFDR Delegated Regulation and other legislation, as well as challenges in accessing reliable and comprehensive ESG data, as contributing to the complexity of the framework.  

It was clear from the majority of respondents that the SFDR was being used as a labelling and marketing tool, and not solely as a disclosure framework as intended. Another key difficulty identified was the challenges for both FMPs and end investors due to the inconsistencies between different parts of SFDR, with most respondents calling for the disclosures to be simplified and made more meaningful for investors. 

New categories of sustainability-related financial products

The goal of SFDR 2.0 is make SFDR more efficient, simple and proportionate and a key part of this objective is safeguarding the integrity of the EU single market by ensuring requirements which mitigate risks of greenwashing and aid investors in seizing and comparing opportunities in SFDR products, while also boosting the EU's financial sector’s competitiveness. 

To achieve this goal, SFDR 2.0 sets out the main criteria for products to qualify under each of the New Categories, the applicable exclusions and the information to be disclosed to investors. 

Common exclusions

In addition to introducing a minimum threshold of sustainability-related investments, SFDR 2.0 also requires FMPs to apply a common set of clear exclusions of harmful sectors, excluding investment in any company that: 

• is involved in any activities related to controversial weapons, the cultivation and production of tobacco; 
• is in violation of the UNGC principals or the OECD Guidelines for Multinational Enterprises; 
• derives 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite; 
• develops new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; and/or
• does not have a plan to phase-out from, the exploration, mining extraction, distribution, refining or exploitation of hard coal or lignite for power generation.

(collectively referred to as the Common Exclusions). 

Non-categorised products and other simplification measures

Non-categorised products 

While Article 6 continues to require pre-contractual transparency on integration of sustainability risks for all products, Article 6a introduces specific transparency restrictions for funds not qualifying under the New Categories (Non-Categorised Products). Non-Categorised Products are permitted to make disclosures on integration of sustainability risks, provided they do not form a central element of its investment strategy i.e. less than 10% of the volume occupied by the financial product’s investment strategy. In addition to this, where a Non-Categorised Product includes such disclosures in its pre-contractual documents, it is also required to disclose this information in its annual reports. These restrictions ensure that sustainability narratives for Non-Categorised Products are prevented from making implicit category claims.  

Other simplification measures 

A key simplification measure introduced by SFDR 2.0 is the amendment to Article 6 to remove financial advisers and portfolio managers from scope, meaning that they are no longer required to disclose how sustainability risks are integrated in the investment decision process and the results of the assessment of the likely impacts of sustainability risks on the returns of the products, where relevant, or explain why this is not the case.

SFDR 2.0 also streamlines the requirements in relation to marketing communications and naming rules, with Non-Categorised Products being precluded from making sustainability-related claims in names and marketing communications and Article 9a products being permitted to make such claims in their marketing communications but not their names. The purpose of this is to prevent greenwashing and it will be particularly beneficial for distributors, who will be better able to filter out products based on their client's sustainability preferences. 

The other key proposals under SFDR 2.0 to be aware of relate to simplification measures and are set out below: 

• Entity-level PAI disclosures are removed entirely, resulting in lower recurring compliance costs for managers.
  
  
• The definition of 'sustainable investment' under Article 2(17) SFDR is removed along with the underlying concepts (including DNSH and good governance concepts) embedded in the category criteria. The purpose of this deletion is to facilitate the practical application of the term.
  
  
• Article 1(26) now provides a definition for 'sustainability-related financial product with impact', and specific disclosures requirements apply to products categorised thereunder, recognising the practice of impact investing as a sub-feature directed at providing solutions to address specific social or environmental challenges and underpinned by a pre-set impact theory and expressed in terms of key performance indicators.
  
  
• Streamlining of requirements in relation to product website disclosures, pre-contractual disclosures and periodic disclosures.
  
  
• Additional transparency requirements in relation to data usage and for use of external and in-house estimates by FMPs.
  
  
• Opt-out from SFDR 2.0 permitted for existing closed-ended products no longer offer to new investors.
  
  
• The Commission (not the ESAs) will define the proposed regulatory technical standards on product naming, category criteria, and simplified disclosure templates. Additional national level requirements are prohibited. 
  
  
• Clarification that SFDR should not prevent financing of the defence sector (subject to the Additional Exclusions), which is consistent with broader EU strategies.

Next steps

The Commission's SFDR 2.0 proposal will be negotiated by the European co-legislators and thereafter is intended to apply from 18 months after entry into force (following publication in the Official Journal of the EU). Details of the final product categories will be confirmed in the final regulation while Level 2 measures to clarify specific elements of the revisions to SFDR will be published in due course. Asset managers and FMPs that have existing funds in scope of the revised SFDR requirements will need to ensure compliance with SFDR 2.0 by its effective date once that is known. Though no formal date has been confirmed yet, implementation with a start-up period is expected in late 2027 or 2028. No additional transitional provisions are applied for existing AIFs or UCITS. 

Ahead of implementation, asset managers and FMPs will need to undertake a mapping exercise of the existing SFDR Article 8 and 9 products against the New Categories to assess if and how they will be classified and ultimately identify what changes will need to be made to comply with the new product requirements and the revised precontractual, website and periodic reporting disclosures. This assessment will also include consideration of closed-ended funds which have closed before the proposal takes effect determining if they will avail of the proposed exemption. More broadly, managers will have to assess the impact on KIDs, marketing communications and potential client sustainability preferences. 

Understandably, fund managers may be trepidatious about such a material overhaul of a regulatory framework that required significant engagement only a few short years ago. However, there is cautious optimism that the Commission's SFDR 2.0 proposal when implemented will simplify and reduce the sustainability-related administrative burden and disclosure requirements for FMPs and financial advisers while improving investors’ ability to comprehend and compare sustainability related products and reduce the risk of greenwashing.