SFDR 2.0 In Focus: Key Industry Pressure Points And Early Signals From Council And European Parliament

• Exemption from SFDR product rules: Financial products that are marketed only to professional investors should either be excluded from SFDR 2.0 altogether, or subject to a more limited and targeted set of rules. This would allow financial market participants to choose whether they want to classify a product under one of the SFDR 2.0 product categories (and comply with the related requirements) or instead keep the product outside those specific rules.
• No limits for sustainability communication: Where products are marketed exclusively to professional investors and do not fall into any SFDR product category, they should still be allowed to communicate freely about sustainability features, without being subject to marketing restrictions (provided communications remain clear, fair and not misleading).
• Exclusion of occupational pension schemes: Member States should have the option to exclude occupational pension schemes from the scope of SFDR 2.0.

Invest Europe (opt-in on demand)

BVI (opt-out)

AIMA (opt-out and lighter naming/marketing restrictions)

PensionsEurope (explicit discretion to exclude occupational pensions)

• Modify the restrictions on sustainability information: The current test in Art. 6a (limiting sustainability content to less than 10% of the volume of the investment strategy section) should be replaced by allowing limited factual information on a product's sustainability strategy for non‑categorised products while requiring a clear, standard disclaimer that the product is not in an SFDR product category.
• Define "sustainability-related claim": Clarify which communications are in scope of Article 13 to avoid restrictions on factual statements about basic sustainability risk integration or stewardship/engagement, especially in conversations and materials shared with professional investors (see also pressure point 1).
• Fix the rules for "mixed" products (Article 9a): Clarify under which circumstances products fall under Article 9a(2) (products holding a share of categorised products) and what these products can and cannot do.
• Abolish ESMA Fund Names Guidelines: Clarify that SFDR 2.0 replaces the ESMA guidelines, so managers don't have to follow two overlapping naming regimes.
• Adjust to blind pool structures and illiquid assets: Allow the threshold to be measured using a metric that fits the investment strategy (for example, capital deployed as well as NAV), provided the methodology is applied consistently and explained clearly to investors. Acknowledge flexibility during the ramp‑up phase and the divestment/wind‑down phase, recognizing that private funds build and exit portfolios over time rather than maintaining a static allocation. Permit disclosure instead of exit or de-categorization if investments become ineligible for a category during the holding period and the manager has taken reasonable steps to remedy this.
• Admit general purpose sovereign instruments as eligible investment in Transition and Sustainable: Broaden eligibility for general‑purpose sovereign instruments so they can count towards the Transition and Sustainable categories - either by removing the current limitations or by allowing inclusion where managers can provide "proper justification" supported by recognised assessment tools (e.g. sovereign transition frameworks). A more cautious stand would be to keep general-purpose sovereign instruments primarily within ESG Basics but asks for dedicated technical rules (in Level 2) to define how sovereign instruments held for investment vs liquidity are treated and the methodologies that may be used to identify the sustainability of these assets.
• Provide guidance on ancillary assets: Introduce clear operational guidance on how to treat short positions, derivatives, and holdings used purely for hedging or cash management when assessing compliance with minimum eligibility thresholds.
• Remove additional exclusions as compared to EU Climate Benchmarks/ESMA Fund Names Guidelines: Align SFDR 2.0 exclusions with the exclusion lists for Climate Transition Benchmarks (CTB) and Paris-Aligned Benchmarks (PAB), as set out in the ESMA Fund Names Guidelines.
• No exclusion on coal revenue for Transition: Do not to apply the ">1% coal/lignite revenue" exclusion to the Transition category since this would reduce the range of assets Transition products can invest in - including companies that are still transitioning (especially in emerging markets and hard‑to‑abate sectors) - and could slow down real‑world emissions cuts. If exclusion is kept, there is a suggestion to add an exception for companies with credible transition/exit plans.
• Adjust exclusions to illiquid assets: Apply exclusions on a best‑efforts basis for investors in illiquid assets and permit investments breaching exclusions due to post-investment developments to remain in the portfolio if not reasonably curable and adequately disclosed to investors.
• Provide guidance on scope and content of exclusions: Clarify that exclusions apply to companies only (not, inadvertently, to other asset types). Provide guidance on vague phrases such as companies being "involved in" certain activities or "in violation of" standards. Exclusions tied to UN Global Compact Principles or OECD Guidelines should be amended to not accidentally require a specific third‑party benchmark-style determination that doesn't match how this is managed in practice.

These amendments would reduce "greenhushing" practices and ensure clear communication on sustainability-related elements of the investment strategy for non-categorised products marketed to retail investors (for professional investors see also pressure point 1).

Invest Europe (10% test, disclaimer)

AIMA (ESMA fund names superseded, Article 9a products, marketing to professional investors)

BVI (sustainability-related claims, Article 9a products, abolish ESMA fund names guidelines)

AFME/ISDA (withdraw/abolish ESMA fund names guidelines under SFDR 2.0)

PRI (10% test, standard 6a disclaimer)

EUROSIF (disclaimer non-categorised products)

Adapting a more flexible approach for blind pools and illiquid assets avoids forcing private capital funds into artificial portfolio rebalancing or sequencing disposals to preserve compliance.

Broadening the treatment of general-purpose sovereign instruments would benefit broader retail strategies (including for insurance and pension products in scope of SFDR), protect diversification and recognize that sovereign instruments can be central to transition and sustainable frameworks.

Invest Europe (ramp-up/divestment, NAV methodology flexibility, passive breaches)

AIMA (ramp‑up/divestment, shorts/derivatives treatment, NAV methodology flexibility)

IIGCC (sovereign instruments)

ICMA (sovereign instruments)

BVI (sovereign instruments)

Eurosif (treatment sovereign instruments in ESG basics)

The industry has already spent considerable time on implementing the exclusion set from the ESMA Fund Names Guidelines based on the CTB/PAB exclusions. Aligning SFDR 2.0 to these exclusions lowers operational cost for managers who have already built systems around this.

For illiquid assets, a best efforts approach (and avoiding automatic failure for post investment "passive" breaches where reasonable steps were taken) would make exclusions operationally workable for illiquid portfolios, limiting forced-sale dynamics that can conflict with the duty to act in investors' best interests and recognising data gaps and limited control over portfolio companies in certain strategies (e.g., minority stakes, credit).

AIMA (align exclusions to ESMA fund names)

BVI (limit exclusions to CTB for Transition, coal/gas phase-out not always feasible for emerging markets; clarify exclusions apply to companies only; EU guidance for vague terms)

AFME/ISDA (Align exclusions with Benchmark Reg)

IIGCC (requests CTB exclusions + new fossil project exclusion for Transition)

ICMA (remove coal/lignite exclusion- alternative, exception for credible transition/exit plans)

Eurosif (remove coal/lignite from transition)

Invest Europe ("best efforts" basis, avoid "automatic breach" outcomes concerns UNGC/OECD exclusion and coal/lignite); EFAMA

• Define key terms in Transition and ESG Basics categories: Clarify the "grey" terms that decide which strategies qualify for each product category. In particular, clear guidance on what counts as a "credible" transition plan, a "credible" engagement approach and "credible" science-based targets in the Transition category - and guidance on what "proper justification", "progress towards integration" and "underperforming asset" means in ESG Basics. Ideally, these details should sit in Level 2 rules or voluntary guidance so firms and regulators apply them consistently.
• Rename the "ESG Basics" category: It is seen as understating the ambition of many strategies that would fall into this category and may be commercially or politically problematic in some markets.

ICMA (request for clarifications of key concepts in Article 7)

AFME/ISDA (request for clarifications of key concepts in Articles 7 and 8)

Eurosif (request for definitions of key concepts in Article 7 and for proper justification in Article 8)

PRI (define "proper justification")

Invest Europe (rename ESG Basics label)

AIMA (rename ESG Basics label)

• Make impact add-on available for all three product categories: The impact add on should be available for products classified as "Sustainable", "Transition", and "ESG Basics", with the same impact requirements applying across all three categories. This is important to ensure that private equity and venture capital impact strategies - many of which would otherwise fall under the ESG Basics category - are properly included in the framework.
• Provide robust impact add-on criteria: Clear criteria should be developed to ensure that any product using the impact add on makes credible and substantiated claims. These could include: a clearly defined impact objective linked to specific environmental or social outcomes (KPIs), evidence that investors contribute to achieving that impact in a way that matches the chosen strategy, and a clear explanation of how impact is measured and monitored.

Eurosif (stronger substantiation)

PRI (clarification of rules)

Invest Europe (allow impact add-on in Article 8)

ICMA (allow communication on impact as part of Article 8)

• Sequence and align SFDR reform with MiFID II, IDD and PRIIPs changes: Reforms to SFDR should be sequenced and designed in parallel with related reforms across the wider regulatory ecosystem, including MiFID/IDD suitability requirements¹ and PRIIPs disclosures², to avoid unintended gaps or inconsistencies.
• Remove MiFID II and IDD barriers to assessing sustainability outside SFDR: Current misalignments with the MiFID/IDD framework should be addressed so that the sustainability characteristics of products outside the SFDR regime can still be assessed and, where appropriate, recommended to clients with sustainability preferences.
• Extend SFDR scope to additional instruments and services: The scope of SFDR should be extended to certain instruments and services, such as structured notes, mandates and portfolio management, and insurance based investment products (IBIPs), so that client sustainability preferences can operationally rely on SFDR product categories.
• Amend PRIIPs disclosures to accommodate sustainability information where SFDR does not apply: PRIIPs disclosures should be amended to accommodate sustainability information for PRIIPs that fall outside SFDR. Alternatively, manufacturers should be allowed to opt in to applying SFDR product categories to specific PRIIPs (for example, structured products).
• Align implementation timelines across SFDR, MiFID II and IDD: Changes to MiFID/IDD and SFDR Level 2 measures should be delivered on aligned timelines, with clear transitional mapping between regimes, to preserve a broad investable universe and minimise operational disruption.

AFME/ISDA (alignment MiFiD/IDD/PRIIPs)

BVI (alignment MiFiD/IDD)

ICMA (alignment MiFiD/IDD)

PRI (alignment CSRD/EU Benchmark Regulation/ESGratings/MIFID/IDD, extension of scope to selected instruments and timely MiFID/IDD changes)

• Provide immediate regulatory relief for obligations that are removed under SFDR 2.0: Obligations that are removed under SFDR 2.0 (particularly entity level PAI reporting and product level website disclosures) should fall away immediately with the adoption of the Level 1 measures, even if the broader SFDR 2.0 framework applies at a later stage.
• Start the implementation period from finalisation of Level 2 measures: Level 2 measures should be finalised as early as possible, and the 18-month implementation clock should run from Level 2 finalisation (instead of running from entry into force of Level 1 measures). This would give firms sufficient time to adapt operationally, including in more complex structures such as funds-of-funds or layered investment arrangements.
• Permit voluntary early adoption of SFDR 2.0: Financial market participants should be permitted to apply SFDR 2.0 on a voluntary basis in the period between adoption and the mandatory application.

BVI (immediate relief)

AFME/ISDA (immediate relief, flexibility to apply SFDR 2.0 during implementation period)

ICMA (immediate relief, flexibility to apply SFDR 2.0 during implementation period, extra funds of funds and multi-manager time)

Invest Europe (immediate relief; extra funds of funds time)

AIMA (immediate relief; implementation period linked to finalising of Level 2; extra funds-of-funds time)