What Does The Final Draft Of The SFDR2 Mean For Private Fund Managers?

In our alert The Seeds for SFDR II? Two EU Commission Consultations, we discussed the September 2023 consultations in which the European Commission published the review of the Sustainable Finance Disclosure Regulation (SFDR). The European Commission has now published its draft amending Regulation (SFDR2).

In this alert, we set out a baker's dozen of questions and answers for private fund (Fund) managers (Managers) who manage Funds in the EU and non-EU Managers who market Funds to EU investors. We address what we see as the main changes that the SFDR2 will make to the current SFDR regime, what these changes will mean for Managers, how SFDR2 rules are likely to apply and when the SFDR2 is expected to take effect.

1. What is the aim of the SFDR2?

The SFDR has, in recent practice, been the most important piece of ESG-related EU legislation, together with the regulatory technical standards (RTS) that supplement the SFDR, for Managers — imposing requirements on information disclosure in pre-investor materials, such as private placement memoranda, information disclosure on websites and ongoing reporting to investors. It applies to both Managers established in the EU who manage and market Funds under the EU member state regimes that implement the Alternative Investment Fund Managers Directive (AIFMD) and non-EU Managers who market the Funds they manage to investors in the EU.

The SFDR2 draft proposed text notes the challenges, deficiencies and resulting complexity and costs for financial market participants, such as Managers, under the SFDR. These include data gaps, the SFDR's failure to accommodate transition assets and the market's approach to treat the SFDR as a labeling regime rather than a disclosure framework. The variety in interpretation and implementation by Managers, insufficient clarity for investors and divergent approaches by national competent authorities, all of which lead to the risk of greenwashing, are also highlighted.

For Managers, the SFDR2 is intended to simplify and reduce the sustainability-related administrative and disclosure requirements and enhance the framework's coherence. For investors, it is intended to improve their ability to understand and compare sustainability-linked products.

2. What are the main changes to the substantive provisions of the SFDR under the SFDR2?

There are three main changes under SFDR2 (which include a repeal of the April 2022 Delegated Regulation with the RTS that set out the SFDR's implementing measures):

• Deleting the requirements for (a) entity-level "principal adverse impact" statements under Article 4 and (b) disclosures on information on remuneration policies under Article 5.
• Reducing product-level disclosures, with refocused templates (to follow when the SFDR2 RTS are produced) for categorised products and fewer sustainability indicators. The supplemental pre-contractual disclosures under the EU Taxonomy Regulation are to be deleted, although for Funds with an environmental objective, Taxonomy Regulation compliance is one way to fall within the scope of two of the new product categories, so it is still very much a feature of the SFDR2.
• Introducing a three-way categorisation of financial products, with the names "transition" (new Article 7), "ESG basics" (new Article 8) and "sustainability" (new Article 9), with ESG features, each applying a 70% threshold/minimum proportion of investments and exclusions that align with ESMA's guidelines on funds' names using ESG or sustainability-related terms.

3. Will the SFDR2 be voluntary for professional investor-only Funds?

No – these funds remain in scope, as is the case for the SFDR. In a change to the widely-circulated leaked draft, the published version does not include a voluntary regime for Managers who manage and market Funds that are limited to professional investors.

We would make two points as to why this about-turn may not be that consequential:

• We are seeing increasing opportunities for both EU Managers and non-EU Managers to further enable the "retailisation" of their Funds as they attract investment from nontraditional sources, such as sophisticated investors and high-net-worth individuals and categories of investors that may not currently be treated as professional investors. These Managers would therefore still have fallen within scope of the leaked version of SFDR2.
• Managers may have wanted to opt in to the SFDR2 in any event, to meet market expectations and facilitate investor demand, when possible, or when there was a possibility of interests being made available to "retail investors" in their Fund in the future.

Portfolio management provided by Managers under the "top-up" provisions in Article 6(4) of the AIFMD and the activities of financial advisers, who neither manufacture nor manage sustainability-related financial products, nor make them available to investors, will be outside the SFDR2's scope.

4. When is the SFDR2 due to come into force and how will it impact existing Funds?

5. What are the three product categories and how do the investment thresholds apply?

The headlines are set out in the following table. We note that further details, to supplement the requirements and disclosures for each product classification, are to follow in the SFDR2 RTS. These will address the relevant principal adverse indicators (PAIs) for voluntary use and build on the SFDR RTS and European Sustainability Reporting Standards; specify permitted deviations from the exclusions; clarify how to calculate the 70% threshold and any phase-in period; and set out any conditions for the qualifying listed investments. For the Transition and Sustainable categories, Managers have flexibility in how to disclose these indicators, for instance by using different indicators or a qualitative explanation of such impacts and actions, if it is a better fit for the nature of the impact identified or addressed.

6. Is there any flexibility in the specific investments that fall within each product category?

Each category has a catchall to include those nonspecific investments, as noted in the previous table, provided "proper justification" is disclosed. We must wait for the SFDR2 RTS to understand any further detail regarding eligibility requirements on this, as well as how the phase-in period to meet the 70% threshold will work. However, it's worth noting that the SFDR2 recitals recognise that the fact that there are a wide variety of assets, strategies and sustainability objectives pursued in the market means that there is no "one size fits all" on how to granularly specify what a positive contribution to a sustainability objective or transition should comprise; thus allowing some welcome flexibility in investment approaches in each category.

7. For Funds that fall outside the scope of any of the categories under the SFDR2, will there be any ongoing obligations under the SFDR?

There are no transitional provisions for these legacy Funds. Although the current regulatory framework under the SFDR will fall away, many legacy Funds with contractual obligations to investors on their sustainability-related investment objectives, including current reporting for Article 8 and Article 9 Funds under the SFDR, will need to continue to comply.

8. What does a Manager have to do if the Fund they manage and market does not fall under any of these categories (i.e., is classified under Article 6a)?

For Funds that do not fall under one of the three new categories, Managers can voluntarily disclose information on whether and how their Funds consider sustainability factors, provided such information:

• is not a central element of the pre-contractual disclosures (i.e. it is secondary to the presentation of the Fund characteristics both for breadth and positioning in the document and is less than 10% of the volume relating to that Fund's investment strategy) or key investor information document;
• does not constitute either investment claims under Articles 7, 8 or 9 or "sustainability-related claims"; and
• forms part of the annual reports.

Therefore, in a change from the leaked version (which had a blanket restriction on not referring to this information in marketing communications), Managers will still be able to include sustainability information on their Funds in marketing materials addressed to investors or potential investors and third party communications, as well as "pre-marketing" information or communications. But for Article 6a Funds they will be restricted from including "sustainability-related claims" in either their names or marketing communications.

9. Are there any website disclosures mandated under the SFDR2?

Article 10 of the SFDR has been revised under SFDR2 so that website disclosures must be produced for clear, succinct and investor-understandable information for each financial product referred to in:

• the list of pre-contractual disclosures set out below; and
• periodic reports in compliance with Article 11 of the SFDR.

These are to be disclosed in a prominent easily accessible area of the website, in a way that is not misleading and is accurate, fair, clear, simple and concise. The Manager is to ensure these disclosures are kept up to date; and explain any amendments on their website , as currently required under the SFDR.

10. For the SFDR2's categorised Funds, are there any more rules on marketing communications?

We would flag three points:

• For products using one of the categories, marketing communications must not contradict the information to be disclosed under the amended Regulation (as per the SFDR).
• "Impact" in a Fund name can only be used by those with transition-related or sustainability-related Funds with impact.
• Otherwise, Fund names and marketing communications (and Article 9a Funds for marketing communications only) can include sustainability-related claims provided they are not misleading and are fair, clear and consistent with the Fund's sustainability features.

11. Do ESMA guidelines under the AIFMD on Funds' names continue to apply?

Yes, the SFDR2 category exclusions build on these guidelines. The guidelines will still apply under AIFMD marketing rules; therefore for a newly-categorised funds with an ESG or sustainability-related term in its fund name, the 80% minimum proportion may apply in addition to the SFDR2 conditions and criteria.

12. What are the new requirements for pre-contractual disclosures and periodic disclosures?

For each of the sustainability-related financial products, such as Funds, the SFDR2 sets out a list of pre-contractual disclosures (which will be set out in a two-page template with the RTS) to be made, including:

• a statement that conditions are met and the exclusions apply (and any additional exclusions);
• a description of the strategy's transition-related objective/the sustainability factor the Fund integrates/the sustainability-related objective, application choice and relative share of investments and phase-in period to meet the 70% threshold;
• for Article 7 and Article 9 funds with environmental objectives, whether, and the extent to which the Manager meets the requirement for Taxonomy-aligned environmental investments of 15% or more;
• the sustainability-related indicator(s) used for measuring compliance with strategy, progress toward the objective and information on actions to address any underperforming assets for the 70% threshold; and
• data sources used to inform the details previously set out.

For those with transition-related products under Article 7 or sustainability-related products under Article 9 with impact, additional pre-contractual disclosures include:

• the intended impact(s) in terms of specified E or S objectives, underpinned by a preset impact theory; and
• provisions to manage, measure and report on the intended impact, including underlying investments and investor contributions.

For (non-categorised) Funds comprising two or more underlying products referred to in Articles 7, 8 and 9 (and whose Managers can rely on the pre-contractual disclosures made by other managers of those products) additional pre-contractual disclosures include the:

• composition of Fund in terms of relative shares of underlying investments of Article 7, 8 or 9;
• share of the Fund that does not comprise those under Articles 7, 8 or 9; and
• objective, strategy and applicability of any exclusions or unlabelled share.

The SFDR2 template for periodic disclosures (like the one pre-contractual disclosures) is to follow. For any products that fall within each of the three categories, Managers must describe the extent that the applicable objectives are met, or the sustainability factors are integrated. This is with reference to either: (a) (for ESG Basics Funds) the sustainability-related indicator(s) used for measuring compliance with strategy and progress towards the objective and information on actions to address any underperforming assets for the 70% threshold; or (b) (for Transition and Sustainable Funds) whether, and the extent to which the Manager meets the requirement for Taxonomy-aligned environmental investments of 15% or more.

For those with transition-related or sustainability-related products with impact, in addition to the disclosures, there are provisions to manage, measure and report on the intended impact, including underlying investments and investor contributions.

13. What else does a Manager need to consider?

Managers will need to formalise and document arrangements with external data providers (other than that that is freely available); in addition any internal data must be estimated on formalised and documented methodologies. There are also increased disclosure and transparency provisions in place on client requests.

A final point to note is that although the new product categorisation may have a similar look and feel to the UK Financial Conduct Authority's labels under its Sustainability Disclosure Requirements and labeling regime, the ability to map between regimes and any consistent interoperability will need to be considered on case-by-case basis, given the differences and nuances in application between the different regimes.

You may also be interested in our related briefings:

Horizon Scan for Private Investment Funds: Key Recent Funds, Legal and Regulatory Developments to Look Out for in the Coming Months (October 2025)
Simpler and More Streamlined Sustainability Disclosure for UK Private Fund Managers: Taking Stock and Comparing With the EU
Corporate Sustainability Reporting in the EU: Simplification, Decluttering, and Regulatory Burden Reduction Under Omnibus I or Continued Uncertainty?
A New Sustainable Investment Framework for the EU? ESMA's Latest Opinion
ESG and EU Fund Names: ESMA's Final Guidelines

Footnotes

1. Under the Defence Readiness Omnibus, there is a proposed amendment to the EU climate-related benchmarks regulation would replace reference to "controversial weapons", with "prohibited weapons" i.e., "anti-personnel mines, cluster munitions, biological and chemical weapons the use, possession, development, transfer, manufacture, and stockpiling of which is expressly prohibited by the international arms conventions to which the majority of member states are parties..." as listed, with a 6 month transition proposed for existing benchmarks. This would impact both the CTB and PAB exclusion.

2. The CTB+ exclusions (our own definition) are those prohibitions listed in (a)-(d) inclusive in the PAB list - in companies: (a) involved in any activities related to controversial weapons (as referred to in international treaties and conventions, UN principles and where applicable, national legislation); (b) involved in the cultivation and production of tobacco; (c) that benchmark administrations find in violation of the United Nations Global Compact principles or the OECD Guidelines for Multinational Enterprises); and (d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite.

3. In addition to the CTB+ exclusions, those others listed in the PAB exclusions, being: (e) that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels; (f) that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels; or (g) that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100g CO2 e/kWh.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.