SFDR 2.0: Understanding the Proposed Changes to the Framework

Recognizing the need for greater clarity and efficiency in the EU’s Sustainable Finance Disclosure Regulation, or SFDR, the European Commission published a significant legislative proposal on Nov. 20. This proposal, if ultimately agreed upon by the EU legislative bodies, would lead to the repeal and replacement of the existing SFDR primary and delegated regulations, marking a major overhaul referred to as SFDR 2.0. 

The SFDR was introduced by the European Commission in 2021, as part of the EU’s Sustainable Finance Action Plan. Its core aim was to establish a common framework for how sustainability information should be disclosed across the financial sector and to improve transparency and accountability for investors.

To address this, the SFDR established two core disclosure layers: entity-level reporting through Principal Adverse Impact, or PAI, statements, and product-level disclosures that categorized financial products under Articles 6, 8 and 9 of the regulation depending on how sustainability was integrated. At entity level, firms are required to disclose whether and how they consider the negative impacts of their investment decisions on environmental and social factors, using a prescribed set of PAI indicators. These disclosures are intended to provide transparency on firmwide sustainability impacts, regardless of individual products. At product level, financial products are grouped based on their sustainability profile: Article 6 products do not promote environmental or social characteristics, Article 8 products promote such characteristics, and Article 9 products pursue a specific sustainable investment objective. 

Together, these layers were designed to give investors a clearer understanding of both a firm’s overall sustainability approach and the specific sustainability features of individual products.

However, a market-driven tendency led to Articles 8 and 9 being widely interpreted as “product labels,” a classification not originally intended by the regulation. This led to an inconsistent application of the rules across the market, creating differences in how firms presented similar sustainability strategies, and ongoing challenges related to data availability and methodological consistency. 

What the EU Is Proposing Under SFDR 2.0

The SFDR 2.0 proposal addresses the identified ambiguities and inconsistencies through the following revisions:

1. Entity-Level Requirements

SFDR 2.0 removes several firm-level obligations, including entity-level PAI disclosures and transparency requirements related to remuneration policies. Furthermore, financial advisors and portfolio managers are also removed from the scope of certain obligations.

2. New Product Categories

SFDR 2.0 replaces the previous disclosure-based structure with three new product categories: Transition (proposed Article 7), ESG-Basics (proposed Article 8), and Sustainable (proposed Article 9). As stated in the Official SFDR 2.0 Proposal, each category requires at least 70% of investments to meet clearly defined sustainability criteria. The 70% threshold for the Transition and Sustainable categories is deemed to be met if the product has a proportion of taxonomy-aligned investment equal to or higher than 15%, or is replicating or managed in reference to an EU Paris-aligned benchmark, or PAB.  All three categories must also apply exclusions drawn from the PAB rules. These exclusions prohibit investments in companies involved in controversial weapons, tobacco, violations of UN Global Compact principles, significant coal, oil and gas activities, and companies with high carbon intensity misaligned with a 1.5°C pathway. The new categories are defined by their investment objectives: 

1. Transition products typically target companies that are not yet sustainable but are credibly improving. 
2. ESG-Basics products focus on broad ESG integration with measurable safeguards and exclusion standards. 
3. Sustainable products concentrate on investments that already meet environmental or social objectives and demonstrate alignment with sustainability outcomes. 

However, as mentioned in an overview by The European Commission, it is important to note that it does not actually force market participants to consider green assets when they are investing, but instead it lays out the rules that require them to pass sustainability assessments in relation to their financial products. These rules apply to asset managers, insurance undertakings, occupational and other pension providers, as well as investment firms. 

3. Removal of the ‘Sustainable Investment’ Definition

The original definition of “sustainable investment” has been deleted and replaced with category-specific criteria and exclusions. This change reflects feedback that the earlier definition was applied inconsistently across the market.

4. Change to Rules on Names and Marketing

Only products that meet the criteria of the new categories can use sustainability-related terms in their names or marketing materials. All sustainability claims must be clear, fair and consistent with the product’s disclosed features.

5. Transition & Grandfathering Provisions

Existing products may benefit from a transition period, and closed-ended funds launched before SFDR 2.0 may be grandfathered under the previous rules. However, an official press release on the SFDR 2.0 Proposal mentions that Undertakings for Collective Investment in Transferable Securities and Alternative Investment Funds, which together cover most regulated EU investment funds marketed to investors, do not benefit from transition relief due to existing European Securities and Markets Authority naming guidelines.

6.  Data & Methodology Standards

Firms will need formalized, documented approaches for using external data providers and for producing estimates where data is missing. They must also be able to provide additional information on request, including methodologies and data sources.

As set out in the Official Proposal, the SFDR 2.0 will now enter the EU’s legislative process, where the European Parliament and Council will review the final text and propose amendments. The final version is expected to be adopted over the course of 2026, in line with EU legislative timelines. The regulation will only be adopted following completion of this interinstitutional process, including the European Parliament’s first reading and subsequent formal approval. Following the finalization, firms will be given an 18-month grace period to adjust to the new disclosure changes. This means that from 2028, we should start to see firms adopting the updated requirements, as well as certain product-level disclosures being applied in 2029.

Why the Proposal Is Important for Asset Managers 

As set out in the Commission’s proposal, the  SFDR 2.0 will require asset managers to take a more hands-on and structured approach to how sustainability is applied across their product ranges. This involves reviewing existing funds against the new product categories, demonstrating that at least 70% of assets meet the relevant sustainability or transition criteria, and confirming compliance with Climate Benchmark exclusions and fossil-fuel-related restrictions. Asset managers will also need to ensure that the indicators they rely on can be supported by reliable data, with clear methodologies and governance processes in place. This places greater importance on internal documentation, data governance and ongoing monitoring. Therefore, asset managers with structured internal processes and transparent data practices will be better prepared to adjust to the revised requirements and manage the transition to SFDR 2.0.

How We Support Clients Navigating the SFDR

Octus ESG Data assists with the data collection and reporting obligations under SFDR. Our automated PAI reporting tool provides standardized and hands-off reporting for the PASI statement in line with Article 7 of the SFDR, which is required for all managers across Articles 6, 8 and 9. Our database covers all the mandatory and voluntary PAI indicators.

As the EU moves toward an updated structure under SFDR 2.0, having this level of traceability and clear data sourcing already in place can help our clients adapt to future requirements with confidence.

Sources

1. Official SFDR 2.0 Proposal
European Commission. Proposal for a Regulation on sustainability-related disclosures in the financial services sector (SFDR 2.0). Research Accessed December 2025

2. Sustainability-Related Disclosure in the Financial Services Sector
European Commission. Sustainability-related disclosure framework for financial market participants and financial advisors. Research Accessed December 2025

3. 2023 SFDR Implementation Review
European Commission. Targeted consultation and implementation review of the SFDR. Research Accessed December 2025

4. European Commission – Official Press Release on SFDR 2.0
European Commission. Press release announcing the SFDR 2.0 proposal and key policy objectives. Research Accessed December 2025

5. SFDR 2021 Disclosure Regulation (EU) 2019/2088
European Union. Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector.  Research Accessed December 2025.