The Sustainable Finance Disclosure Regulation (SFDR) is the EU’s framework for governing how sustainability considerations are disclosed in investment products. While designed to improve transparency and reduce greenwashing, SFDR gradually evolved into a de facto labelling system, with Articles 8 and 9 shaping how funds were marketed and perceived.
In late 2025, the European Commission put together an SFDR 2.0 proposal. It’s intended to acknowledge that this approach has created complexity, inconsistency, and confusion for investors. By shifting toward clearer product categories and simpler disclosures, the reform aims to restore credibility and usability.
A New Category-Based Framework
SFDR 2.0 introduces three product categories: Sustainable, Transition, and ESG Basics. While categorization is voluntary, funds choosing a category must meet mandatory criteria for that classification. Each category is tied to a minimum 70% portfolio alignment with the stated strategy, alongside mandatory exclusions for activities such as those involving controversial weapons, tobacco, hard coal, and severe breaches of international norms. Products outside these categories face tighter limits on ESG-related naming and marketing claims.
Sustainable products are reserved for funds investing primarily in sustainable activities or assets, including taxonomy-aligned strategies and Paris-aligned benchmarks. These products are subject to the strictest fossil fuel exclusions, including a ban on new coal, oil, and gas development.
Transition products are designed to capture strategies financing the shift toward sustainability. They rely on credible transition plans, science-based targets, and structured engagement, with tighter restrictions on fossil fuels than ESG Basics products and a clear focus on forward-looking change.
ESG Basics products integrate ESG approaches in the investment strategy but do not qualify as Sustainable or Transition. While still subject to baseline exclusions and the 70% alignment rule, this category has drawn early criticism for its relatively lenient treatment of fossil fuels.
Less Complexity, Tighter Guardrails
SFDR 2.0 removes entity-level PAI disclosures and simplifies product templates. Rather than relying on the current sustainable investment definition and DNSH mechanics in SFDR 1.0, the proposal operationalizes ‘no harm’ and safeguards through a common exclusion baseline plus product-level disclosure of principal adverse impacts, with DNSH and good governance reflected via category criteria.
Disclosures are significantly shortened, with pre-contractual and periodic reports capped at two pages, and marketing rules tightened to limit sustainability claims to qualifying products.
The intent is clear. SFDR 2.0 shifts from dense, technical disclosures toward clearer categories supported by exclusions and simpler safeguards.
Timeline and Market Impact
The legislative process is expected to conclude in late 2026 or early 2027, followed by an 18-month implementation period. Until then, asset managers must continue complying with SFDR 1.0 while preparing for a full reclassification of their product ranges.
For the market, this likely means a smaller but more clearly defined universe of labelled funds. Many current Article 8 and 9 products are expected to reclassify, while Sustainable products under the new regime may be fewer but broader in scope. Asset managers face near-term transition costs and communication challenges, but also the prospect of greater long-term clarity and reduced compliance complexity.
A Reform Still Under Scrutiny
Initial reactions have been mixed. Industry groups broadly welcome the simplification and stronger fossil fuel exclusions for Sustainable and Transition products. At the same time, concerns persist regarding the scope of the ESG Basics category, the lack of a level playing field for unclassified funds, and the absence of more stringent engagement requirements for transition strategies.
Organizations such as Eurosif and Morningstar have described the proposal as a step forward that still leaves room for improvement, particularly in preventing greenwashing at the lower end of the spectrum. Triodos Investment Management has also voiced similar caution.
What SFDR 2.0 Signals
SFDR 2.0 reflects a broader recalibration in EU sustainable finance policy. After years of expanding disclosure requirements, the focus is shifting toward usability, clarity, and enforceable standards. For asset managers, the message is straightforward: Sustainability claims will be more tightly defined, product positioning will matter more, and the margin for ambiguity is narrowing as SFDR enters its next phase.
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