Leaked Proposal for “SFDR 2.0” Suggests a Major Overhaul of the EU Sustainable Finance Disclosure Framework
On 6 November, a leaked version of the European Commission’s proposal for a revised Sustainable Finance Disclosure Regulation (“SFDR”) surfaced online. The leaked document is the new level 1 SFDR regulation (“SFDR 2.0”) and outlines a substantially restructured framework for sustainability-related disclosures and financial product classifications. While the full picture will only emerge once the accompanying level 2 rules are published, the proposed changes indicate a complete overhaul of the current SFDR regime, including several helpful simplifications.
By way of background, the SFDR is an EU regulatory regime that came into force in 2021, requiring financial market participants such as asset managers to make certain sustainability-related disclosures.
1. Key Features of the Leaked Proposal
New product categories
The well-known “Article 8” and “Article 9” product classifications are abolished. In their place, sustainability-related products are grouped under three new categories (or labels):
- Transition (Article 7)
- Other ESG (Article 8)
- Sustainable (Article 9)
Each category comes with its own minimum portfolio composition requirements – notably at least 70% portfolio alignment with the relevant label’s criteria – and a set of mandatory exclusions. A fourth “mixed” category (Article 9a) will allow products (e.g. funds) to combine several categories.
Detailed qualification criteria will follow in the upcoming level 2 regulation, but it appears that qualifying under these new categories will be more challenging than the current Article 8 classification.
While it will be possible for firms to offer uncategorised products, firms will then be limited in terms of the sustainability claims they can make in relation to such products (e.g., it will not be permitted to claim that an uncategorised product has a transition-related objective or that it invests in sustainable assets).
Abolition of the PAI regime
The Principal Adverse Impacts (PAI) regime is removed in its entirety, meaning that PAI disclosures will no longer be required. At product level, PAI is to some extent replaced by mandatory exclusions, but entity-level PAI disclosures will disappear altogether (including the prescriptive disclosures on PAI indicators).
Explicit recognition of impact investing
For the first time since the SFDR’s introduction, impact investing is recognised as a possible add-on feature for products in the Transition (Article 7) and Sustainable (Article 9) categories.
Restrictions on product naming and marketing
The proposal includes rules limiting how products may be named or marketed, particularly for products not qualifying under any of the new categories.
Financial advisers are removed from the scope
Investment firms and credit institutions providing portfolio management and investment advisors providing investment advice are removed from the scope of the SFDR.
Exemptions
Article 17(2) provides an opt-out possibility for alternative investment funds (AIFs) that are only made available to professional investors, allowing them to opt-out entirely from the SFDR 2.0 categorisation framework. While they will still be subject to certain other parts of the new SFDR, the opt-out would seemingly allow such funds to market their sustainability characteristics without having to qualify for the new labels (provided that the marketing is fair, clear and not misleading). Existing closed-ended AIFs will also be exempt if they are no longer open to new investors when the new regime enters into effect. Uncertainties remain regarding the scope of the opt-out and the exact implications of opting out. Nonetheless, our expectation is that the opt-out will be widely used, at least initially until the market’s requirements regarding the use of labels become clear.
Other points to note
- Disclosures on taxonomy alignment are no longer required.
- The separate product website disclosure is abolished; firms shall instead publish their pre-contractual and periodic disclosures on their websites.
- The obligation to explain how sustainability is integrated into remuneration policies is abolished.
- The SFDR’s “sustainable investment” definition is deleted; firms must instead assess their investments against the detailed inclusion and exclusion criteria for the relevant category.
- Existing rules on sustainability risk disclosures (Articles 3 and 6) remain largely unchanged.
2. Next Steps
The formal publication of the Commission’s proposal is expected on 19 November, with the new regime anticipated to come into force towards the end of 2027 or early 2028.
The Commission will work on producing new level 2 rules including simplified disclosure templates (limited to two pages), naming rules and detailed criteria for each new category.
If adopted in its current form, the SFDR 2.0 represents a fundamental redesign of the SFDR architecture, shifting from disclosure-based classifications to a label-based system with substantive portfolio composition requirements but also significant simplifications.
Given that the new regime’s entry into force is still a few years away and that the proposal may be amended along the way, we do not see any immediate need for action at this time. That said, we expect that firms will want to form an early understanding of how the new rules may affect their business going forward. We will continue to monitor developments and provide updates as the matter progresses. Please feel free to reach out to us should you have any questions.
Contact:
Carl Johan Zimdahl, Partner
carl.johan.zimdahl@msa.se
