Sustainable Finance Disclosure Regulation (SFDR) 2.0: Europe’s Sustainable Finance Reset

SFDR 2.0 in perspective: recalibration, not retreat

Marking a decisive shift in the EU’s approach, on 20 November 2025, the European Commission proposed a set of substantial amendments to the Sustainable Finance Disclosure Regulation (SFDR). Rather than signalling a retreat from sustainability ambition, “SFDR 2.0” should be understood as a recalibration away from disclosure towards usability, comparability, and investor relevance.

The Commission’s message is clear. Sustainable finance rules should help investors make informed decisions and reduce greenwashing risk in practice, not simply expand reporting obligations. The proposed framework narrows the focus to what is most decision-useful, while raising the bar on when sustainability claims can legitimately be made.

Whether SFDR 2.0 succeeds will ultimately depend not on the intent of the reform but rather on how product categories, criteria, exclusions and exemptions are finalised and applied in practice. Investor scrutiny, therefore, remains essential, even as the regime itself is simplified.

Why the SFDR was revised

The SFDR was originally designed as a transparency regime. Its core objectives were to improve comparability between financial products, enhance the quality of sustainability disclosures, and mitigate greenwashing risks across EU capital markets.

In practice, however, Article 8 (funds promoting environmental or social characteristics) and Article 9 (sustainable investment funds) quickly evolved into an unintended labelling system. Funds were commonly described as “Article 8” or “Article 9” products, despite the regulation never defining these as quality labels, creating confusion, mis-selling risks and undermining meaningful differentiation. Following extensive market consultations, a broad consensus emerged that SFDR 1.0 was not functioning as intended. The Commission’s proposal reflects this feedback, acknowledging that transparency alone is insufficient if it does not translate into clarity.

From Articles 8 and 9 to product categories

At the heart of SFDR 2.0 is a key structural change replacing Articles 8 and 9 with a voluntary system of defined product categories. Funds that choose to make sustainability- or ESG-related claims would fall into one of three core categories with additional sub-categories and the option not to categorise products at all:

• Transition
• ESG Basics
• Sustainable

This shift formalises what the market had already been doing informally, but with clearer boundaries and minimum expectations.

Crucially, the new framework moves away from ambiguously defined concepts such as “sustainable investment,” replacing them with defined criteria and exclusions tied to each category.

For investors, product categorisation promises clearer comparability. Rather than relying on fund names or Article labels as proxies for sustainability quality, investors should gain a better understanding of what a product is actually designed to do, how sustainability considerations are integrated, and what is explicitly excluded. For asset managers, the shift may represent a loss of flexibility previously embedded in Article 8 positioning. Funds will need to be reassessed against explicit thresholds and criteria, prompting strategic decisions:

• Qualify under a category,
• Re-engineer the strategy, or
• Step back from ESG positioning altogether.

For ESG data providers, the emphasis moves away from broad disclosure mapping towards category-specific metrics and verification of eligibility against defined criteria.

Minimum thresholds and exclusions: raising the bar

SFDR 2.0 introduces a common structural requirement across categories: a 70% minimum portfolio alignment threshold with the relevant sustainability strategy, alongside mandatory exclusions including tobacco, controversial weapons, and human rights violations.

By introducing a dedicated Transition category, SFDR 2.0 legitimises “not-yet-green” portfolios. Whilst exclusions focus on new fossil fuel and coal projects, they allow exposure to existing assets under certain conditions. Phased alignment and real-world constraints are recognised, though phase-in periods must be transparently disclosed.

For investors, these thresholds and exclusions will increase consistency across products within a given category. However, they may also reduce choice, particularly for diversified or multi-asset strategies. The Transition category further creates space to support harder-to-abate sectors without being excluded from sustainability discourse, though uncertainty remains around what constitutes a “credible” transition plan. For asset managers, these requirements may necessitate portfolio redesign, especially for legacy Article 8 funds. For ESG data providers, demand is likely to grow for robust exclusion screening, fossil fuel exposure differentiation, and credible assessment of mandatory transition plans.

Sustainability and ESG claims: tightening the rules

Another defining feature of SFDR 2.0 is the tightening of rules around sustainability claims. ESG and sustainability language in fund names and marketing would be reserved for categorised products only. Non-categorised products could still disclose sustainability risks, but only in a limited manner. SFDR 2.0 is designed as a clean break, with limited grandfathering provisions, no automatic migration from SFDR 1.0 classifications, and the removal of opt-outs previously available for products marketed exclusively to professional investors.

For investors, this change reduces the risk of exposure to greenwashed fund names and marketing by creating clearer signals of products that have committed to defined sustainability criteria. Many asset managers can expect a wave of fund renaming, reclassification, or deliberate de-branding, particularly of funds that adopted a lighter-touch sustainability approach under SFDR 1.0. ESG positioning will require more explicit justification, and reputational risk will increase where claims go beyond substance. For ESG data providers, the shift reinforces demand for evidence that supports sustainability claims tied to specific product categories.

Streamlined disclosures and the end of entity-level PAIs

SFDR 2.0 proposes a significant reduction and standardisation of disclosure templates. Further, the Commission proposes to remove entity-level Principal Adverse Impact (PAI) reporting, while retaining product-level PAIs for the Transition and Sustainable categories. This shifts the focus towards material and category-relevant information, rather than extensive reporting against exhaustive indicator sets.

For investors, disclosures should become shorter and more relevant at the point of decision, reducing noise without eliminating insight. The loss of “house-level” comparability is unlikely to be significant, as such information is rarely used in practice. Asset managers will likely experience an ease in reporting burdens, though expectations of internal coherence will rise as disclosure volume can no longer serve as a proxy for robustness and substantiated product-level claims. ESG data providers will face demand for higher-quality, materiality-driven datasets.

What happens next and what to watch

The proposal will now move through trialogue negotiations between the European Commission, Parliament and Council, followed by the adoption of Delegated Acts. Likely pressure points during this process include the treatment of fossil fuel activities, the removal of PAIs, the lack of grandfathering, and the treatment of sovereign bonds.

While further refinements are inevitable, the direction of travel is unlikely to change. SFDR 2.0 reflects a market-driven consensus that sustainable finance regulation must prioritise clarity, credibility and usability if it is to support meaningful capital allocation decisions.