Finalised SFDR 2.0 proposal: the Commission’s proposal and what it means for funds marketed in the EU
1. Executive summary
On 20 November 2025, the European Commission published its final legislative proposal to overhaul the Sustainable Finance Disclosure Regulation (“SFDR”) – widely dubbed “SFDR 2.0”. The proposal pivots the regime away from today’s disclosure-only approach and introduces three core product categories (Transition, ESG Basics, Sustainable) with minimum criteria and a 70% “eligible investments” threshold together with mandatory exclusions, plus a Combination construct for funds of funds and similar structures investing in other categorised products or eligible investments. We have previously commented on an earlier, leaked draft of the Commission’s proposal which included several industry friendly changes such as an opt-out possibility for AIFs only marketed to professional investors and the abolishment of disclosures on principal adverse impacts (“PAI”). In the Commission’s final proposal, these changes have been rolled-back, forcing all financial market participants in scope of the SFDR to categorise their products (e.g. funds) or operate within a narrow Article 6a channel for non-categorised products. Application is scheduled for 18 months after entry into force, pointing to 2028 at the earliest.
Key points:
- The new product categories (or labels) are named ‘Transition’ (Article 7), ‘ESG Basics’ (Article 8) and ‘Sustainable’ (Article 9).
- Categorised funds (products) must invest at least 70% in eligible investments and apply certain mandatory investment exclusions.
- A ‘Combination’ (Art. 9a) category is available for funds investing into other categorised funds and eligible investments (e.g. funds of funds).
- Non-categorised funds (Article 6a funds) are subject to restrictions on their sustainability claims in marketing materials, names and pre-contractual information.
- PAI disclosures are still required for Transition (Art. 7) and Sustainable (Art. 9) funds, but less prescriptive requirements than under SFDR 1.0.
- Taxonomy disclosures are broadly optional, but if a Transition or Sustainable fund pursues an environmental objective, it must disclose whether (and to what extent) it meets the threshold via Taxonomy-aligned investments.
- If external data is used, documented arrangements with data providers are required (not required for open-source content).
- The Commission’s proposal is not necessarily the end result; the proposal will now be negotiated between the EU Council and Parliament, with the agreed version likely to enter into force in 2028. In parallel, the Commission will work on producing delegated acts which will include more detailed provisions to supplement the SFDR 2.0, including more detailed criteria for eligible investments and new, simplified disclosure templates (max two A4 pages).
2. Key differences between the final proposal and the draft leaked on 6 November 2025
Opt-out possibility for AIFs marketed to professional investors removed
The leaked draft of the Commission’s proposal introduced a helpful possibility for professional investors-only AIFs to opt-out from the SFDR. The final proposal does not include this opt-out, resulting in all firms having to adopt a category or live within Article 6a constraints (further explained below).
Fund-level PAI disclosures retained (but more flexible compared to SFDR 1.0)The leaked draft abolished the requirement on PAI disclosures entirely. The final proposal retains fund-level PAI disclosures for Transition and Sustainable funds but grants more flexibility compared to today’s set of mandatory PAI indicators (and entity-level disclosures are abolished). The Commission will define PAI indicators in the upcoming delegated acts, based on existing PAI indicators and ESRS for voluntary use. It thus appears that firms will be able to choose whether to use these indicators or different indicators, qualitative explanations, etc.
Taxonomy disclosures retained (but targeted use)
The leaked draft deleted the requirement on Taxonomy disclosures entirely. The final proposal retains Taxonomy disclosures, but generally optionalises their use. For Transition and Sustainable funds with an environmental objective, firms must disclose whether and how the minimum threshold is being met via Taxonomy-aligned investments.
3. The new product categories explained
The SFDR 1.0’s “Article 8” and “Article 9” disclosure frameworks are abolished and replaced by the new product categories/labels “Transition”, “ESG Basics” and “Sustainable”.
Common mechanics across categories
- Each category has a 70% “eligible investments” threshold, meaning that 70% of the fund’s assets must consist of the listed types of “eligible investments”. Additionally, the remaining 30% must not contradict the fund’s sustainability claims. More details on the eligibility criteria will follow in the Commission’s future delegated acts.
- Each category’s list of “eligible investments” includes a “catch-all” for investments that fit the category’s theme (e.g. sustainable transition) without otherwise qualifying as an eligible investment. The catch-all provision means that such investments qualify as eligible investments provided that “proper justification” is included in the disclosures.
- For Transition and Sustainable funds, the 70% test can also be met by holding ≥15% Taxonomy-aligned investments.
- Mandatory exclusions: Each category sets out certain mandatory investment exclusions, requiring the exclusion of investments in certain practices and sectors commonly considered to be most harmful.
- PAIs: Articles 7/9 include obligations for Transition and Sustainable funds to identify and disclose fund-level PAIs and explain mitigating actions. As noted above, however, PAI disclosures under SFDR 2.0 will be more flexible compared to today’s set of mandatory PAI indicators since firms may choose whether to use the Commission’s PAI indicators or different indicators, qualitative explanations, etc.
The key thresholds, exclusions and additional criteria for the three new core product categories (and the combination category) are summarised below.
| Category | Threshold | Mandatory exclusions | Additional information |
| Transition (Article 7) |
The Transition category targets financial products (e.g. funds) that claim to invest in the transition of undertakings, activities or assets towards sustainability, or to contribute to such a transition.
Threshold requirement: 70% of assets in eligible investments meeting a clear and measurable transition objective relating to sustainability factors. The eligible investments are listed in Article 7(2) and include: Alternatively, the 70% test can be satisfied through (i) the fund’s portfolio being at least 15% Taxonomy-aligned or (ii) the fund’s alignment with an EU climate transition or EU Paris-aligned benchmark. |
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PAIs (and mitigating measures) need to be identified and disclosed.
Transition funds may include “impact” as an add-on feature. While “impact” is thus a sub-category rather than a standalone category, Transition funds that objectively target a pre-defined, positive and measurable impact may use “impact” in their name. Further disclosures regarding e.g. the intended impact and measurements/ reporting are required for impact funds. |
| ESG Basics (Article 8) |
The ESG Basics category targets financial products (e.g. funds) that claim to integrate sustainability factors beyond risk management.
Threshold requirement: 70% of assets in eligible investments integrating sustainability factors. The eligible investments are listed in Article 8(2) and include: |
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| Sustainable (Article 9) |
The Sustainable category targets financial products (e.g. funds) that claim to invest in sustainable undertakings/economic activities/assets, or to contribute to sustainability.
Threshold requirement: 70% of assets in eligible investments with a clear and measurable objective related to sustainability factors, including environmental and social objectives. The eligible investments are listed in Article 9(2) and include: Alternatively, the 70% test can be satisfied through (i) the fund’s portfolio being at least 15% Taxonomy-aligned or (ii) the fund’s alignment with an EU Paris-aligned benchmark. |
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PAIs (and mitigating measures) need to be identified and disclosed.
Sustainable funds may include “impact” as an add-on feature. “Impact” is thus a sub-category within the Sustainable category, and Sustainable funds that objectively target a pre-defined, positive and measurable impact may use “impact” in their name. Further disclosures regarding e.g. the intended impact and measurements/ reporting are required for impact funds. |
| Combination (Article 9a) |
The Combination category targets financial products that claim to combine two or more Article 7, 8 or 9 products, e.g. funds of funds or insurance products investing in other categorised products.
Threshold requirement: 70% of investments in Transition, ESG Basics and/or Sustainable products or their underlying eligible investments. |
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Combination funds meeting the 70% threshold are treated as categorised funds.
Combination funds that do not meet the threshold (sub-70%) are treated as non-categorised funds. In contrast to other non-categorised products, sub-70% Combination funds may include sustainability claims in their marketing materials (relating to the underlying share of categorised products). Sub-70% Combination funds are also subject to specific pre-contractual disclosure requirements relating to the share of underlying categorised products. |
4. Life outside the labels: Non-categorised funds (Article 6a)
Article 6a introduces significant limitations as to the sustainability claims firms can make in relation to non-categorised funds, especially in marketing materials. Firms may still include some descriptions on whether and how such funds consider sustainability factors in regulatory pre-contractual disclosures (e.g. the AIFMD Article 23 disclosure for AIFs), however, such sustainability claims/information:
- must not be a “central element” of the pre-contractual disclosures; meaning that it must be secondary in breadth/positioning and limited to <10% of the investment strategy description;
- must not appear in any UCITS KIID/PRIIPs KID;
- must not constitute a claim that would trigger Article 7, 8 or 9 categorisation;
- must be reported back on in the fund’s regulatory periodic reports; and
- must not be included in fund names or marketing materials (e.g. pitch-books).
5. What is deleted or narrowed down from SFDR 1.0?
The proposal removes/simplifies several SFDR 1.0 elements: (i) entity-level PAIs and remuneration-linked disclosures are abolished; (ii) financial advisers fall out of scope; (iii) MiFID portfolio management is removed from the definition of “financial product”; (iv) “good governance” for investee companies is deleted; and (v) fund-level Taxonomy-alignment reporting is materially minimised/optionalised (subject to the environmental-objective caveat mentioned above).
6. Timeline and treatment of existing funds
- Start date. The new SFDR regime is set to apply 18 months after its entry into force, with mid 2028 being the expected application date (although this will ultimately depend on how long the EU’s legislative process takes, which requires the EU Council and Parliament to agree on a final text).
- Existing closed-ended funds. Closed-ended funds that are fully closed at the date of the new SFDR’s application will be exempt from the new SFDR unless they opt-in. Where a fund uses this exemption, it appears that it would fall out of scope of the SFDR entirely (i.e. from its previous SFDR 1.0 disclosure/reporting obligations as well). Where practicable, firms may consider accelerating fundraising to fall within that relief.
- Open-ended funds or funds not yet fully closed. There is no “do-nothing” option. Managers must re-classify such existing funds under Article 7, 8 or 9 or move to Article 6a (non-categorised funds).
7. Suggested action points
- Portfolio mapping. Although it is still early days, firms should eventually start considering the appropriate categories (or Article 6a) for their existing and upcoming funds. For existing funds, firms may start mapping their current portfolio companies to test feasibility of meeting the 70% threshold and mandatory exclusions (and – where relevant – PAI consideration).
- Ensure contractual flexibility for upcoming funds. Given that it is still unknown what the finally adopted SFDR 2.0 (and the delegated acts) will look like, firms currently in fundraising should seek to ensure contractual flexibility as to their SFDR categorisation and commitments. Where possible, contractual commitments to adherence to today’s SFDR classifications and definitions should be avoided (as such contractual commitments may otherwise oblige firms to continue to comply with such SFDR 1.0 commitments after the introduction of the SFDR 2.0).
- Name & sustainability claims control. Where firms intend to have existing funds be non-categorised, firms should ensure compliance with the Article 6a guardrails, e.g. absence of sustainability claims in fund names/marketing materials and compliance with the restrictions on sustainability claims/information in pre-contractual disclosures (<10%) and KIDs/KIIDs, etc.
- Data governance. Firms should prepare to put in place agreements with their external providers of sustainability data (or record when sources are open-source/public).
- Combination structuring. For funds of funds/secondaries funds, firms should examine possible Art. 9a pathways and, if sub-70%, design permitted marketing templates (differentiating between the underlying categorised and non-categorised products, respectively).
- Taxonomy stance. For Transition and Sustainable funds with environmental objectives, firms should plan to disclose whether the 70% threshold is met via Taxonomy-aligned activities.
- Transition plan for existing funds. Firms should assess whether their closed-ended funds can benefit from transitional relief and whether open-ended (or not yet closed) funds should migrate to Articles 8, 7 or 9, or pivot to Article 6a with revised messaging.
8. Our view
Although the Commission’s finalised SFDR 2.0 proposal is not as industry friendly as the leaked draft, it still introduces a number of improvements and simplifications compared to today’s SFDR regime. The new categories/labels will hopefully be more meaningful than today’s Article 8 and 9 disclosure frameworks, and it is positive that the proposal recognises both transition and impact investing – key concepts essentially overlooked in SFDR 1.0. The Combination category is also a potentially helpful addition for funds of funds and similar products. Additionally, the increased flexibility around PAI and Taxonomy disclosures will likely be welcomed by many market participants.
On the downside, the limitations imposed on non-categorised funds under Article 6a will likely cause practical challenges – especially the prohibition on sustainability claims in marketing communications of non-categorised funds. As many investors will expect fund managers to explain their sustainability approach (beyond mere risk management) in e.g. DDQs, there is a risk that firms will be forced into categorising their funds in order to do so.
At first glance, the proposed lists of ‘eligible investments’ generally appear broad enough to be workable, especially considering the catch-all provisions (noting that it remains unclear what type of ‘proper justification’ that will be required to fit within the catch-all provisions). As with SFDR 1.0, a lot of the key criteria and concepts will be supplemented by the more detailed delegated acts to be produced by the Commission. While the Commission’s proposal looks somewhat promising, it is too early to tell how big of an improvement the full SFDR 2.0 regime will be until the delegated acts have been published and the negotiations between the EU Council and Parliament have concluded.
We will continue to monitor developments and provide updates once we know more. Please feel free to reach out to us if you have any questions.
Contact:
Carl Johan Zimdahl, Partner
carl.johan.zimdahl@msa.se
