On November 20, 2025, the European Commission officially launched its legislative proposal for significant updates to the Sustainable Finance Disclosure Regulation (SFDR). This new framework, referred to as SFDR 2.0, aims to introduce a categorisation regime for financial products, marking a notable shift from the existing disclosure requirements. While the exact implementation date remains uncertain, the changes are expected to take effect by the end of 2027 or in 2028.
The Proposal outlines several core features, notably the removal of certain entity-level disclosures. Financial market participants with 500 or more employees will no longer be required to disclose remuneration information or the principal adverse impacts of their investment decisions regarding sustainability factors. This alteration is likely to be welcomed by many firms currently subject to the SFDR.
New Product-Level Disclosures Introduced
Under the new framework, the European Commission proposes three core categories for product-level disclosures, each with mandatory criteria. These criteria focus on two main aspects: exclusions and the positive contribution of portfolio assets. To qualify, a minimum of 70% of a fund’s assets must adhere to an environmental, social, and governance (ESG) strategy that aligns with the fund’s claims.
Additional requirements include alignment with EU climate benchmarks and the EU Taxonomy, which identifies sustainable economic activities. Funds will need to demonstrate investments in sectors that contribute to climate transition and adhere to credible transition plans. This includes commitments to science-based targets and active sustainability engagement, ensuring that investment strategies are not only profitable but also socially responsible.
Several categories are outlined for funds, including those that replicate or track EU Paris-Aligned Benchmarks and those investing in green bonds, social entrepreneurship, or environmental initiatives. Furthermore, the Proposal restricts the use of the term “impact” in fund names to those classified as transition or sustainable funds that aim for measurable positive outcomes.
Phased Implementation and Future Considerations
The introduction of a phased implementation for the 70% minimum asset allocation allows funds to reach this threshold over a defined period, providing flexibility for fund managers. Importantly, the Proposal defines “environmental objectives” in alignment with the EU Taxonomy Regulation, encompassing areas such as climate change mitigation and biodiversity protection.
Article 6a allows for voluntary transparency regarding sustainability factors in funds not classified under Articles 7, 8, or 9. However, this information must not mislead investors, and sustainability-related disclosures should be subordinate to the primary investment strategy, limiting their presence to less than 10% of the documentation.
Notably, the Proposal eliminates a previously included opt-out option for alternative investment funds marketed to professional investors, raising questions about the regulatory landscape’s direction. Additionally, Article 13(3) restricts claims related to sustainability in fund names and marketing materials, necessitating careful navigation by managers who wish to highlight sustainability efforts without breaching compliance.
Looking ahead, the European Commission’s proposal will now undergo examination by the European Parliament and the Council of the European Union, potentially leading to further amendments. Asset managers are encouraged to assess their existing fund strategies against the new categories, engage with investors regarding their expectations, and consider strategies that may integrate sustainability factors while adhering to the new regulations.
As the financial sector prepares for these changes, the implications of SFDR 2.0 are likely to reshape how sustainability is approached in investment practices across Europe and beyond.
