SFDR 2.0 update

For products targeting companies and activities that are clearly taking actions toward environmental sustainability (i.e. reducing gas emission, improving energy efficiency, increase use of renewable energy, etc.) and can demonstrate progress through measurable indicators (i.e. emissions reduction targets, percentage of revenues aligned with transition activities, etc.) applying EU Climate Transition Benchmark (CBT) exclusions (investment only in companies on which are on a credible and measurable path towards decarbonization) and incorporating tools such as transition plans, structured engagement, and Taxonomy‑aligned activities.

ESG Basics is expected to be the most common category for existing Article 8 funds maintaining the role of a mainstream ESG category introducing 70% threshold, the mandatory CTB exclusion. The simplified disclosure and the strict limit on claims while offering lower operational burden compared to the Sustainable or Transition categories.

It is designed for products integrating ESG factors in a meaningful and systematic way, but which do not pursue a sustainability objective while however applying CTB exclusions.

ESG Basics products may invest in companies with stronger ESG ratings, integrate ESG metrics in screening, and apply ESG scoring methodologies clearly disclosing indicators they use to assess ESG performance.

While falling under this category, products cannot market themselves as “impact” products and/or claim to deliver measurable sustainability outcomes.

For products that aim to achieve clear and measurable sustainability objectives supported by credible sustainability indicators rather than merely integrating ESG factors or facilitating transition efforts.
The category applies PAB (Paris-Aligned Benchmark) exclusion and restricting fossil‑related activities; products must identify relevant Principal Adverse Impact (PAI) and must disclose any action to address them.

The Sustainable Category under SFDR 2.0 is the strictest and outcome-oriented classification; through the 70% minimum threshold, the PAB exclusions rules, the mandatory PAI disclosures, the formal impact label and all evidence-based disclosure, it will be ensured that only products with genuine, measurable sustainability outcomes can market themselves as “sustainable”.

A new Combined Product (Article 9a) category would allow a financial product to meet the sustainability qualification by investing primarily (Fund of Funds) in other products that are already classified under transition, ESG Basics and Sustainable categories and are consequently compliant with the 70% investment threshold. This means that the product inherits the sustainability classification of the underlying funds and can rely on their respective disclosures, indicators exclusions and methodologies.

Existing Article 8 & 9 products must be reassessed and potentially redesigned to meet the new criteria with no grandfathering period will apply.

The new product categories are intended to align more clearly with MIFIDII/IDD sustainability preference frameworks, requiring updates to distribution and client-facing materials.

While SFDR 2.0 reduces entity‑level obligations, it introduces more structured, evidence-based product‑level requirements. Increasing the need for internal controls and cross-function collaboration.

Firms will need to fully document and govern how sustainability data is sourced and used. This includes, documenting all data sources, outlining methodologies applied and maintaining a clear audit trail for process and assumptions.

The reform aims to reduce greenwashing risk, but may also create a two-tier market. Products that do not meet the new category criteria will face strict limitations in terms of sustainability-related terms (e.g. “impact”) in names or marketing materials. However, closed-end funds that are closed to new investments before SFDR 2.0 may be out of scope.

SFDR 2.0 will introduce significantly streamlined documentation, with  the reporting and several disclosures limited to a maximum of two pages,

Additional guidance and regulatory technical standards referred to the implementation of the proposal need to be delivered and are expected from regulators and legislators; investment managers and product managers shall closely monitor the development of SFDR 2.0 to anticipate any necessary adjustments to the funds’ strategies and to the portfolios’ composition.