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On 20 November 2025, the EU Commission published its final proposal for a regulation amending the Sustainable Finance Disclosure Regulation1 (the "SFDR 2.0 proposal").
Introduction
As part of its SFDR review, the Commission carried out a comprehensive assessment of the SFDR framework. Following this review, the Commission concluded that, while the objectives of the SFDR remain broadly supported, several aspects of the rules were complex, difficult to implement, and ineffective.
According to the Commission, the SFDR 2.0 proposal pursues two main objectives:
- The first one is to simplify and reduce the disclosure and operational requirements for financial market participants ("FMPs" (which includes UCITS management companies and AIFMs)).
- The second is to improve end-investors' ability to understand and compare sustainable financial products, and to protect them against potential misleading ESG claims.
The SFDR 2.0 proposal will introduce a significant number of changes to the SFDR framework – the most noteworthy being the replacement of the current Article 8 and 9 SFDR classifications by new product categories:
- "Transition" (updated Article 7),
- "ESG Basics" (updated Article 8), and
- "Sustainable" (updated Article 9).
In addition, the proposal includes an "impact" category (either within Article 7 or Article 9) and a "combined" category which could include fund-of-funds strategies.
Overall, the proposed new categories, together with reduced template disclosures of 2 pages maximum, are to be welcomed in terms of rendering SFDR more understandable for retail investors although it will remain to be seen how relatively complex concepts can be summarised on two pages only (the website disclosures are however not subject to any restrictions as to length). Investor understanding will also depend on the effectiveness of the MiFID changes that will need to be implemented to reflect SFDR 2.0 regarding the role of distributors and the concept of sustainability preferences.
A leaked draft of the proposal was published on 6 November 2025 and while the SFDR 2.0 proposal is generally in line with the leaked proposal, there are a few notable surprises, such as changes to permitted investments, additional exclusions for Article 7, 8 and 9 products, the re-introduction of the principal adverse impact regime and, most importantly, the removal of the possibility for funds with professional investors only to opt-out of SFDR. The leaked proposal had foreseen an exemption for funds made available exclusively to professional investors, which had generally been welcomed by the industry.
It is interesting to note that the Commission has introduced the concept of "claims" in the SFDR 2.0 proposal (the concept of "promotion", that is currently applicable to Article 8 SFDR funds, no longer features). According to the Commission, how and the extent to which categorised products invest according to the objectives of their respective category needs to be consistent with the notion of 'environmental claims' under the Unfair Commercial Practices Directive2 (the requirements of this directive would be met with the proper application of the requirements of SFDR 2.0).
The Commission will be empowered to develop a set of implementing rules as regards the more technical requirements for the categories. These implementing rules will be eagerly awaited by the industry given the possibility for additional stringent requirements applicable to the categories (for example as regards the conditions for the investments and the calculation methodology for the category thresholds). The current SFDR RTS3 will be repealed.
It is important to note that the SFDR 2.0 proposal will now be subject to political negotiations which will mean that further changes are very likely. In particular, this process will provide the possibility for industry associations and stakeholders to make their voices heard.
Summary of key changes
1. The Categories
| Category SFDR Article |
Transition Article 7 |
ESG Basics Article 8 |
Sustainable Article 9 |
|---|---|---|---|
| Description | Financial products which invest in the transition of undertakings, economic activities, or other assets towards sustainability, or contribute to such transition. | Financial products, other than those referred to in Articles 7 and 9, which integrate sustainability factors in their investment strategy beyond the consideration of sustainability risks. | Financial products which invest in sustainable undertakings, sustainable economic activities, or other sustainable assets, or contribute to sustainability. |
| Threshold |
70% threshold linked to the proportion of investments to meet a clear and measurable transition objective related to sustainability factors, including environmental or social transition objectives in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicator(s). Alternatively: The above is considered to be met where at least 15% of investments are in taxonomy-aligned economic activities. OR Products replicating or managed in reference to an EU Paris-aligned Benchmark or EU Climate Transition Benchmark. |
70% threshold linked to the proportion of investments integrating the sustainability factors in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicator(s). |
70% threshold linked to the proportion of investments to meet a clear and measurable objective related to sustainability factors, including environmental and social objectives in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicators. Alternatively: The above is considered to be met where at least 15% of investments are in taxonomy-aligned economic activities. OR Products replicating or managed in reference to an EU Paris-aligned Benchmark. |
| Exclusions |
The exclusions set out in Article 12 (1), points (a), (b), (c) and (d)*, of Commission Delegated Regulation (EU) 2020/18184 (with some exceptions regarding use of proceeds instruments issued by companies such as EU Green Bond issuers). *The coal exclusion did not feature in the leaked proposal. Exclusions of companies with new projects / no plan to phase-out fossil fuel energy. |
The exclusions set out in Article 12 (1), points (a), (b), (c) and (d)*, of Commission Delegated Regulation (EU) 2020/1818 (with some exceptions regarding use of proceeds instruments issued by companies such as EU Green Bond issuers). *The coal exclusion did not feature in the leaked proposal. |
All the EU Paris-Aligned Benchmark5 ("PAB") exclusions must be complied with. Exclusions of companies with new projects / no plan to phase-out
fossil fuel energy. |
| Eligible Investments |
Investments can include any investments referred to in Article 7.2., such as:
In case of transition towards the climate change mitigation
objective, any credible transition plans, science-based targets,
sustainability-related engagement strategy, need to be compatible
with the Paris Agreement and the objective of achieving climate
neutrality as established in Regulation (EU) 2021/11196 (this
requirement was not foreseen in the leaked proposal). |
Investments can include any or a combination of the investments referred to in Article 8.2:
|
Investments can include any or a combination of the investments referred to in Article 9.2, such as:
|
| PAIs | Requirement to identify and disclose the principal adverse impacts of investments on sustainability factors, and an explanation on any actions taken to address those impacts. FMPs may choose to comply in full or in part with this disclosure requirement by using appropriate sustainability-related indicators (this requirement was not foreseen in the leaked proposal). | / | Requirement to identify and disclose the principal adverse impacts of investments on sustainability factors, and an explanation on any actions taken to address those impacts. FMPs may choose to comply in full or in part with this disclosure requirement by using appropriate sustainability-related indicators (this requirement was not foreseen in the leaked proposal). |
Some Article 8 funds with a "sustainability-related term" in their name may struggle to meet the requirements of the Sustainable category as the 70% threshold of the sustainable category is likely to be stricter than the current requirement to investment "meaningfully" in sustainable investments under ESMA's guidelines on funds' names using ESG or sustainability-related terms (the "ESG Naming Guidelines")7. Certain funds may therefore be required to change their name and opt for a different category or increase their sustainable investments.
The new Transition category is a welcome addition to the SFDR framework given the current difficulties for transition strategies to meet the requirement for sustainable investments under Article 2 (17) SFDR to be sustainable from the beginning.
The reference to "basics" in the new ESG Basics category suggests that this may be the category perceived to have the lowest ESG ambition. Article 8 funds currently only applying an exclusionary approach may however struggle to satisfy the requirements of the ESG Basics category as a strategy based on exclusions only may not be enough to satisfy the requirements of this category. This as well as the relatively high minimum threshold of 70% could lead to a number of funds having to update their ESG strategies or consider becoming uncategorised pursuant to Article 6a.
"Impact products" can either sit within the Transition or Sustainable category. This addition is welcome given that impact funds are not currently recognised in the SFDR framework (except in the ESG Naming Guidelines).
A "combined" category would be introduced in a new Article 9a regarding financial products that claim that they combine underlying financial products that are categorised. These products will be deemed to comply with Articles 7, 8 or 9 if they meet the 70%-threshold based on their exposure to the underlying categorised products and comply with the relevant exclusions.
In contrast to the preparatory work carried out in the impact assessment, the Commission decided to introduce the category names directly in the SFDR 2.0 proposal and not in the implementing rules.
Helpfully, the proposal expressly provides for a ramp-up period regarding the 70%-threshold which would need to be reached following the period necessary to implement the investment strategy.
Sustainability-related claims in names and marketing communications would only be allowed for categorised products (so this would not be possible for uncategorised Article 6a products). Sustainability-claims may be included in the marketing communications of Article 9a products provided they are fair, clear and not misleading.
2. Uncategorised financial products
A new Article 6a has been foreseen to be included for uncategorised financial products. As indicated above, FMPs would not be allowed to include sustainability-related claims in the names and in the marketing communications of these financial products. Uncategorised products would be able to make available limited information in their pre-contractual disclosures on how they consider sustainability factors (in addition to sustainability risks). Sustainability-related information must not be included in any UCITS KIID or PRIIPs KID.
It should be noted that the requirement under Article 6 (1) SFDR to disclose how sustainability risks are integrated into management decisions remains in place in respect of all financial products.
3. Main exemptions
Closed-ended funds which were created and distributed before the application of SFDR 2.0 would be able to opt-out (it is assumed that this opt-out would apply to the entire SFDR as amended by SFDR 2.0).
4. Other notable changes
a. Changes in scope and definitions
The SFDR 2.0 proposal focuses on FMPs who manufacture, make available or manage financial products. Financial advisors and discretionary portfolio managers would no longer be in scope.
The definition of "sustainable investment" would be removed (Article 2 (17) SFDR) and certain new definitions added.
b. Do no significant harm
The concept of "do no significant harm" would be removed and replaced by exclusions and the requirement to identify PAIs (or the use of voluntary sustainability-related indicators).
c. Entity level disclosures
In a welcome move, the entity level disclosures regarding principal adverse impacts and remuneration policies would be removed.
d. Pre-contractual and periodic disclosures
The SFDR 2.0 proposal contains new disclosure requirements and notably states that the presentation of the information shall not exceed two pages.
e. Use of data and estimates
A new Article 12a would be added, setting out principles for financial market participants on the use of data and estimates as well as rules on the information to be provided to investors upon request regarding relevant data sources and assumptions underpinning estimates.
f. PRIIPs KID
New disclosures would be introduced in the PRIIPs KIDs.
g. Anti Gold-plating
It is to be welcomed that the SFDR 2.0 proposal contains an anti gold-plating provision which states that Member States and national competent authorities should not set or apply additional requirements as regards the consideration and disclosures of sustainability risks, or as regards the criteria, procedures, and disclosures concerning the categorisation of sustainability-related financial products.
Timing and Next steps
SFDR 2 proposal will now be subject to EU legislative process (i.e. trilogue negotiations between the European Parliament, the Council, and the Commission).
The SFDR 2 proposal, once adopted, shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. It is currently provided that it shall apply 18 months after the entry into force.
Overall it is expected that the legislative process could take the best part of one year so that a final version of SFDR 2.0 may not be ready before 2027 meaning that application may occur in 2028.
Despite the length of time it may take before SFDR 2.0 becomes applicable it would be advisable to start planning ahead as early as possible given the likely significant compliance burden in terms of moving to the categorisation system and complying with the new requirements.
Footnotes
1 Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector ("SFDR")
2 Article 2 (1)(o) of Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market, as amended by Directive (EU) 2024/825 as regards empowering consumers for the green transition through better protection against unfair practices and through better information
3 Commission Delegated Regulation (EU) 2022/1288
5 Article 12 (1) of Commission Delegated Regulation (EU) 2020/1818
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.
