SFDR Overhaul: Commission Proposes Simpler Rules And Three Product Categories

Background

The European Commission (the Commission) has released its long-awaited proposal (the Proposal) for a comprehensive revision of the Sustainable Finance Disclosure Regulation¹ (SFDR) to simplify requirements, curb greenwashing, and improve comparability for investors (SFDR 2.0). The Proposal replaces the current Articles 8/9 framework with three product categories calibrated around clear thresholds, exclusions and concise disclosures, and removes certain entity-level obligations to reduce costs and duplication with the CSRD².

As a general matter, the Proposal introduces a wide range of new mechanisms that will require adaptation by investment funds managers. Although it aims to simplify administrative burdens, the Proposal creates additional layers for product discovery and comparability, and will imply a more careful operationalisation of disclosures, categorisation logic, and internal governance. This revision of SFDR will alter how products are presented, what evidence is expected, and how investors will interpret sustainability narratives.

The implementation of the Proposal will likely require additional guidance from the regulators and legislators, as well as waiting for the regulatory technical standards which should be published by the Commission to facilitate the use of SFDR 2.0.

This publication aims to present the most striking changes introduced by the Proposal.

Main takeaways

Introduction of new categories

The Proposal introduces three categories for sustainability‑related financial products, each anchored by a minimum 70% investment threshold, measured using credible sustainability‑related indicators aligned to the product's binding strategy and a specific list of investments that can be made by such a product of a certain category:

Transition category (new Article 7):

• Requirements: products must allocate at least 70% of investments toward a clear, measurable transition objective and apply modified EU Climate Transition Benchmark (CTB) exclusions, including use‑of‑proceeds safeguards.
• Type of strategies/investments: investing in EU climate benchmarks, Taxonomy‑aligned and transitional activities, credible transition plans/targets, and structured engagement are strategies that can qualify for the transition category. A portfolio‑level transition target approach is also permitted.
• Additional considerations: Where a product replicates or is managed in reference to an EU CTB or EU Paris‑Aligned Benchmark (PAB), or has at least 15% Taxonomy alignment, it is deemed to meet the 70% threshold. Additional exclusions capture, among others, developers of new hard coal, oil or gas projects and certain high‑intensity power generation, subject to limited use‑of‑proceeds carve‑outs. Products in this category must identify and disclose PAIs and actions to address them.

ESG basics category (amended Article 8):

• Requirements: products must allocate at least 70% of investments integrating sustainability factors beyond risk‑management considerations, supported by credible indicators and apply CTB exclusions, including use‑of‑proceeds safeguards.
• Type of strategies/investments: permitted investments include, among other, holdings with stronger ESG ratings or performance against a chosen indicator, with proper justification in disclosures.
• Additional considerations: there is no PAI disclosure requirement specific to this category, and ESG basics products cannot pursue an "impact" strategy.

Sustainable category (amended Article 9):

• Requirements: products must allocate at least 70% of investments to meet clear, measurable sustainability objectives, with Paris‑Aligned Benchmark (PAB) exclusions, additional exclusions for fossil‑related activities, and use‑of‑proceeds safeguards.
• Type of strategies/investments: permits "other investments" in sustainable undertakings, activities or assets contributing to sustainability, with proper justification.
• Additional considerations: where a product replicates or is managed in reference to an EU PAB, or has at least 15% Taxonomy alignment, it is deemed to meet the 70% threshold. Products in this category must identify and disclose PAIs and actions to address them.

Combined products (new Article 9a): a product may meet the 70% threshold by investing in products that themselves meet Articles 7/8/9 requirements, relying on those products' disclosures, provided the relevant exclusions are respected. It is important to note that non‑categorised products may also reference holdings in Article 7/8/9 products if they disclose the portfolio composition and shares of such investments but must otherwise comply with Article 6a and Article 13 constraints.

Deletion of current PAI regime

The Proposal eliminates principal adverse impact (PAI) entity‑level statements and remuneration‑policy links at entity level, removing duplicative requirements with CSRD and cutting costs. The impact assessment estimates that entity‑level disclosures represented about 25% of total SFDR costs, with recurring savings of approximately EUR 56 million annually.

At product level (current Article 7), the current PAI regime is also removed, except for products falling under the new Article 7 or Article 9 categories, for which disclosure of PAI data will remain mandatory.

Deletion of the definition of "sustainable investments"

The Proposal encompasses the deletion of the definition of "sustainable investment." The underlying concepts – contribution to environmental/social objectives, DNSH and "good governance" – are embedded directly into the category criteria rather than retained as a standalone definition.

Across categories, the long‑standing "do no significant harm" (DNSH) principle is replaced by binding exclusions to deliver a more comparable "no harm" baseline.

Transparency restrictions for non‑categorised products (new Article 6a)

Products outside the categories may include limited, ancillary references to sustainability factors/risks in pre‑contractual documents, provided such claims (i) are not central (i.e. secondary to the presentation of the product's characteristics), (ii) do not constitute claims within the meaning of Article 7(1), Article 8(1) or Article 9(1), and (iii) stay within strict prominence limits (i.e. limited to less than 10% of the volume of the investment strategy presentation). Non‑categorised products are prohibited from using sustainability references in their names, marketing communications or KIID.

Definition of impact and use of "impact" (Article 2(26), Articles 7 and 9)

The Proposal introduces the possibility to impact-lens to the product category. In this context, a "sustainability-related financial product with impact" means a financial product categorised in accordance with Article 7 or 9 that has as its objective the generation of a pre-defined, positive and measurable social or environmental impact. The use of "impact" in product names is restricted to such products.

This attempt of definition of "impact" would be the first definition of the term into hard law. Although similar to the widely accepted definition of impact investing, the SFDR concept appears to not squarely recognise the causality between the measurable impact and the investments made by the product. This broad definition risks creating confusion between investments that merely exhibit sustainability characteristics, with an intention, and strategies that are purpose-built to drive additional, demonstrable changes.

Use of estimates (new Article 12a)

Participants must formalise and document data sources and methodologies (including external and in‑house estimates) and provide clients with information on such use upon request. The use of data from external providers must be based on formalised and documented arrangements (other than open‑source or freely available data).

Website disclosures and periodic reporting

Website disclosures are retained and must reference the category. Periodic reporting focuses on progress against indicators and objectives, with standardised presentation to be capped at not more than two pages via delegated acts.

Marketing communications and naming rules (Article 13)

The Proposal introduces rules on marketing communications and naming of financial products. It requires financial market participants to ensure that any marketing communications are consistent with the sustainability information disclosed under SFDR 2.0 and do not contradict it, without prejudice to stricter sectoral legislation such as UCITS, MiFID II, IDD, and PRIIPs.

The article allows sustainability-related claims to be included in the names and marketing communications of Article 7, 8, 9, and 9a products, provided these claims are clear, fair, not misleading, and aligned with the actual sustainability characteristics of the products. For non‑categorised products, sustainability references are prohibited in product names and marketing communications.

Financial products that do not qualify as "sustainability-related financial products with impact" are prohibited from using the term "impact" in their name.

Where a financial market participant provides an ESG rating and communicates it to third parties as part of its marketing materials, it shall publish on its website the information required under point 1 of Annex III to Regulation (EU) 2024/3005. The marketing materials shall also include a link directing readers to these website disclosures.

Level playing field and no gold‑plating (Article 14(3))

Member States are precluded from imposing additional national requirements regarding categorisation criteria or related disclosures.

Exemptions, voluntary opt-in and scope adjustments

The scope is refocused on financial market participants manufacturing or making available products: financial advisers and portfolio management services are removed from the scope in the amended framework.

Closed‑ended products that are closed to new investment before SFDR 2.0 applies may be out of scope. A proposed exemption in an earlier leaked draft of SFDR 2.0 for AIFs offered exclusively to professional investors has not been carried through to the formal proposal. There is no specific grandfathering regime for existing Article 8/9 products.

The voluntary opt-in for funds that are no longer marketed is a pragmatic addition, answering the call from the market. It recognises that some products remain relevant to sophisticated clients without needing the full disclosure that would merely be relevant for retail investors.

However, the policy design should avoid undermining market comparability which remains one of the objectives of SFDR 2.0. If too many products sit outside the standardised categorisation scheme, relevant comparability of sustainability-linked financial products becomes difficult. Moreover, many firms have made material investments to build processes, controls, and reporting to implement the first version of SFDR. The risk is a two-layer ecosystem in which some products operate under the enhanced transparency of SFDR 2.0 while others rely on bespoke or legacy frameworks, thereby complicating investor interpretation.

Further specifications to follow in delegated acts

The Commission shall specify in delegated acts, among others:

• The names of the categories and the detailed conditions for each category;
• Voluntary indicators building on SFDR RTS Annex I PAIs and European Sustainability Reporting Standards (ESRS);
• Permitted exclusions from the deviations, including for the purposes of hedging;
• Methodologies to calculate the 70% threshold and any phase‑in period; and
• The details of the presentation of pre‑contractual and periodic disclosures, with page limits of not more than two pages.

Sovereign and public sector debt.

General‑purpose sovereign, sub‑sovereign and supranational debt is excluded from the numerator of the 70% for Articles 7 and 9. Use‑of‑proceeds instruments issued by public sector entities can count where proceeds do not fund excluded activities or issuers and other conditions are met. Exclusions do not apply to sovereigns for denominator treatment.

Practical implications

For product design and naming, the proposal aligns with the intention of the European Securities and Markets Authority's fund name guidance and determines clear thresholds and exclusions to reduce variance and greenwashing risk. However, clarification on the interaction between SFDR 2.0 and the ESMA guidelines on funds' names using ESG- and sustainability-related terms is required at this stage of the Proposal. There is uncertainty on whether compliance with the categorisation and metrics would be sufficient to meet the ESMA's naming thresholds.

For distribution, the categories are intended to better map to investor sustainability preferences under Markets in Financial Instruments Directive³ (MiFID II) and Insurance Distribution Directive⁴ (IDD). Given the deletion of the SFDR "sustainable investment" definition and overhaul of Article 8/9, the MiFID II sustainability preference framework will likely require revision. For operations, entity‑level costs should fall, and product‑level disclosures are expected to be simpler, more focused and more comparable. For data, formalised estimate governance and concise templates should streamline reporting while preserving flexibility.

What's next?

The Proposal also eliminates the current Article 8/9 product regimes with no specific grandfathering, meaning existing Article 8/9 funds will need to meet the new category conditions or cease making sustainability claims.

The Proposal will proceed under the ordinary legislative procedure. Based on the Commission's indications, SFDR 2.0 could be in force by mid-2028; the final timing will depend on negotiations with the Council and Parliament. It will enter into force 20 days after its publication in the Official Journal of the EU and apply after an 18-month transition period.

In parallel, the regulatory technical standards which are expected to provide necessary guidance in the implementation of the new SFDR regime are not expected to be adopted before October 2027.

The developments on SFDR 2.0 should be monitored closely by investment funds managers in order to anticipate any necessary adjustments to the funds' strategies or the composition of their portfolios, as well as the next steps to be taken in order to implement it.

Footnotes

1 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.

2 Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting.

3 Commission Delegated Regulation (EU) 2021/1253 of 21 April 2021 amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms.

4 Commission Delegated Regulation (EU) 2021/1257 of 21 April 2021 amending Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359 as regards the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products.

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.