SFDR 2.0: What Are the Key Proposed Changes?

Introduction

• The European Commission has released the official version of its proposal to overhaul the Sustainable Finance Disclosure Regulations (SFDR) (the Proposal) on 20 November 2025.
• In revising the framework, the European Commission restates its goals of:
  1. Simpler rules
  2. Lower administrative burden
  3. Better enforcement
• It notes that almost 50% of EU assets under management (AUM) are designated Article 8 or Article 9, representing more than 60% of EU funds.
• Europe is “by far” the largest market for such funds, accounting for up to 84% of global sustainable fund assets.

The EU Commission estimates that the proposed 15% Taxonomy alignment threshold should be attainable for about half of the current investment funds disclosing under Article 9.

• There is an exemption for ‘closed-end type’ products that are closed to new investment before the revisions apply.
• Financial advisers are no longer in scope, and neither are banks or investment firms providing portfolio management.
• The revised Proposal expressly references Directive 2005/29 EC — the Unfair Commercial Practices Directive — and Directive 2024/825 with regards to empowering consumers for the green transition. Both instruments should now be considered when making “ESG claims”.
• In the revised Proposal, the concepts of do no significant harm, good governance, substantial contribution to an environmental and social objective, and the principal adverse impacts are retained.

The Key Changes

Under the Proposals, three mandatory categories for financial products will replace the current Article 8 and 9 SFDR designations. These are ‘Transition’, ‘ESG Basics’ and ‘Sustainable Features’.

• Although the conditions vary between the three frameworks, all categories include: (i) a mandatory minimum investment commitment aligned with the label (set at 70%); (ii) a compulsory list of exclusions (which refer back to the Climate Transition Benchmarks and Paris-Aligned Benchmarks); and (iii) a set of permissible investments that operationalise the objectives.
• The categories are:

1. 1. A “sustainability-related financial product”

      • Transition product category — Article 7 (supports an environmental or social transition objective)

        • 70% of investments must meet a clear and measurable transition objective.
          • Note that one way of doing this is where the financial product invests in at least 15% Taxonomy-aligned investments.
          • Includes:
            • Investments in Taxonomy-aligned economic activities, including transitional economic activities and Taxonomy-eligible businesses with a plan to reach alignment over a five-year period.
            • Investments with a credible transition plan
            • Investments with credible science-based targets (undefined)
            • Investments accompanied by a credible sustainability-related engagement strategy with defined milestones and escalation actions pursuing any of the above or other assets with proper justification
            • Article 9 investments pursuing any of the above
            • Investments with a credible transition target set at the level of the portfolio, such as reduction of portfolio emissions over time
            • Other investments in undertakings or assets that credibly contribute to the transition with “proper justification”. (Note this is incredibly flexible.)
          • All of the above are required to be compatible with the transition to a sustainable economy, the Paris Agreement and the EU’s objective of achieving climate neutrality as set out in the EU’s Climate Law.
        • They are subject to the Climate Transition Benchmark exclusions and the exclusion of companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite. There is an exception for investments in use-of-proceeds instruments issued by companies in accordance with the European Green Bond regime or where the proceeds do not fund controversial weapons; the cultivation or production of tobacco; companies that are United Nations Global Compact (UNGC) violators; or the exploration, mining, extraction, distribution or refining of hard coal and lignite. (Note that currently it does not restrict the ability to invest in use-of-proceeds instruments funding the additional excluded activities outlined in the paragraph below; however, we expect this will be amended consistent with the approach taken in Article 9, see below.)
        • They exclude investments in companies that (i) develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels or (ii) develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation.
        • They identify and disclose the principal adverse impacts of their investments on sustainability factors and explain any actions taken to address those impacts.
        • Where there are investments in issuances by public sector entities, those use of proceeds instruments can only be included in the 70% figure where they are issued in accordance with the European Green Bond regime and where the proceeds do not fund controversial weapons, the cultivation or production of tobacco, activities that violate the UNGC or the exploration, mining, extraction, distribution or refining of hard coal and lignite. (We would also expect this to be amended to also include use of proceed instruments funding activities outlined in the additional exclusions.)
      • “ESG Basics” — Article 8 (integrates sustainability factors in their investment strategy)
        • 70% of investments must integrate sustainability factors in accordance with the binding elements of the investment strategy, measured using “appropriate sustainability-related indicators”.
        • They are subject to the Climate Transition Benchmark exclusions and the exclusion of companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite. There is an exception for investments in use-of-proceeds instruments issued by companies in accordance with the European Green Bond regime or where the proceeds do not fund controversial weapons; the cultivation or production of tobacco; companies that are UNGC violators; or the exploration, mining, extraction, distribution or refining of hard coal and lignite.
        • They include:
          • Investments with an ESG rating that outperforms the average rating of the investment universe or reference benchmark
          • Investments that outperform the average investment universe or reference benchmark on a specific appropriate sustainability indicator
          • Investments that favour undertakings with a proven positive track record in terms of “processes, performance or outcomes” related to sustainability factors
          • A combination of Article 8, 7 and 9 investments
          • Other investments integrating sustainability factors beyond the consideration of sustainability risks with “proper justification”.
      • “Sustainable Features” — Article 9 (pursues an environmental or social sustainability objective)
        • 70% of investments must meet a clear and measurable objective related to sustainability factors, including environmental and social objectives, measured using appropriate sustainability-related indicators.
          • Note that one way of doing this is where the financial product invests in at least 15% Taxonomy-aligned investments.
        • They are subject to the Paris-Aligned Benchmark exclusions, with the exception of investments in use-of-proceeds instruments:
          • Issued by companies in accordance with the European Green Bond regime
          • Where the proceeds do not fund controversial weapons; the cultivation or production of tobacco; companies that are UNGC violators; exploration, mining, extraction, distribution or refining of hard coal and lignite; exploration, extraction, distribution or refining of oil fuels; exploration, extraction, manufacturing or distribution of gaseous fuels; or electricity generation with a GHG intensity of more than 100 g CO2 e/kWh
          • Where the proceeds do not fund the additional exclusions outlined in the bullet point below. (Note that this is an uplift for Article 9 products and excludes coal, gas and oil and high carbon intensity electricity generation. There will be real challenges now marketing these funds to Red State investors.)
        • They exclude investments in companies that (i) develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels or (ii) develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation (these are additional exclusions that go beyond those in the Paris-Aligned Benchmark exclusions).
        • They identify and disclose the principal adverse impacts of their investments on sustainability factors and explain any actions taken to address those impacts.
        • They include:
          • Investments in Taxonomy-aligned businesses
          • EU Green Bonds
          • Investments that finance the same undertaking, project or portfolio identified in financing and investment operations benefiting from an EU budgetary guarantee or financial instruments under EU programmes pursuing environmental or social objectives
          • Investments in comparable assets to the above with “proper justification”
          • Investments in European social entrepreneurship funds (EuSEF)
          • Investments in undertakings, economic activities or assets that contribute to an environmental objective or a social objective with “proper justification”
        • Where there are investments in issuances by public sector entities, those use-of-proceeds instruments can only be included in the 70% figure where they are:
          • Issued by companies in accordance with the European Green Bond regime
          • Where the proceeds do not fund controversial weapons; the cultivation or production of tobacco; companies that are UNGC violators; exploration, mining, extraction, distribution or refining of hard coal and lignite; exploration, extraction, distribution or refining of oil fuels; exploration, extraction, manufacturing or distribution of gaseous fuels; or electricity generation with a GHG intensity of more than 100 g CO2 e/kWh
          • Where the proceeds do not fund companies excluded under the additional exclusions outlined above
        • While the concept of “sustainable investment” has been deleted, the underlying concepts have been “embedded” in the requirements for Article 9 products. As such, the following concepts remain in play:
          • Contribution to an environmental and social objective
          • Principal adverse impacts
          • Do no significant harm
          • Good governance
        • Article 9 products will pursue environmental or social objectives that may include EU Taxonomy-alignment and the applicable exclusions “should encompass a value chain associated with fossil fuels, including the expansion of fossil fuels”. [Note we do not have any further information on this language.]

2. 2. A “sustainability-related financial product with impact”

      • It is defined as “a product categorised in accordance with Article 7 or Article 9 that has as its objective the generation of a pre-defined, positive and measurable social or environmental impact”.
      • Disclosures will cover:
        • The intended impact underpinned by a pre-set impact theory
        • Provisions to measure, manage and report on the desired impact

3. 3. Financial products that are “not categorised as sustainability-related financial products” — Article 6

      • These products can include sustainability-related information; however, it cannot be a “central element” of the pre-contractual disclosures and cannot constitute claims within the meaning of Article 7, 8 and 9. Sustainability-related claims cannot be included in the names and in the marketing communications of these financial products. (In due course, reviews of Article 6 materials will be necessary to mitigate greenwashing risk under this rule, including the new requirement that such claims are limited to less than 10% of the “volume occupied by the presentation of the financial product’s investment strategy”.)

4. 4. Product combined categories — Article 9a

      • This is for financial products that claim they are constituted of two or more Article 7, 8 and 9 products.
      • These products can include sustainability-related claims in their market communications so long as those claims are clear, fair and not misleading.

Other points

• The revised Proposal now references a “Phase in Period” for the achievement of ESG claims, noting specifically that “the full implementation of an investment strategy for a given financial market participant can take a certain period of time, especially for alternative or private assets”. This period will be communicated in the pre-contractual disclosures.
• The Article 4 (Entity level PAI disclosure) and Article 5 (remuneration) disclosures are deleted.
• Sponsors will need to document their use of data sources and their use of external and in-house estimates, as well as provide clients with information on request (including methodology, assumptions and precautionary principles around missing datapoints where these are not provided by external data providers) and use of data provided by external data providers, other than open source data or research freely available to the public. This should be according to “formalised and documented arrangements.”
• Article 3 website disclosures remain.
• Detailed and prescriptive disclosures apply across all sustainability-related financial products.
• ESG terms in fund names and marketing will be tightly controlled under the new framework. A fund that is not in a category (or does not meet a category’s criteria) will not be able to call itself “sustainable”, “green”, “ESG”, “impact”, etc. Funds that are already aligned with the European Securities and Markets Authority’s (ESMA) guidelines on fund names are expected to remain compliant, and any adjustments are likely to concern reclassification rather than renaming.
• The European Commission will publish delegated legislation on the below for the categories:
  • Detailed criteria
  • Disclosure templates
• The commission published its proposal on 20 November 2025. We are waiting to hear the positions of the EU Council and EU Parliament and the date for trilogues to begin. Typically, the legislative procedure lasts one to one-and--half years, but sometimes longer when the file is deemed more technical than political, such as with financial services legislation like this one. This means the legislative process may not be completed until late 2026 to early 2027. In any event, the revised Proposal states that the regulation will apply 18 months after it enters into force.
• From January 2028, sponsors shall submit information under Articles 3 and 10 of the SFDR to a European single access point.
  • The Proposals do not include specific grandfathering provisions for existing products that are still open to investment. As such, firms will need to adapt prior to the implementation deadline.