EU SFDR 2.0 – Sustainable Finance Disclosure Regulation review – what changes are on the horizon?

On 20 November 2025, the European Commission published a proposal to amend the SFDR. The proposal, if agreed, would repeal the existing SFDR primary and delegated regulations and would amend the Packaged Retail and Insurance-based Investment Products (“PRIPs”) regulation.

The EU was a first mover in passing sustainability disclosure legislation and the SFDR (which is part of a wider package of sustainability disclosure rules) has applied to financial market participants (“FMPs”, the term includes investment firms and banks providing portfolio management, pension funds, asset managers (AIFMs and UCITS management companies) and insurance companies offering investment products) since March 2021.

As part of its review, the Commission conducted stakeholder consultations and the changes proposed reflect stakeholder views that disclosure under the SFDR was “long, complex and difficult for investors to understand and compare” and that the framework “has not been fully effective in delivering on its broad aim to improve transparency and help mobilise private funds towards diverse sustainability aims”.

We note that financial advisers have been removed from the scope of the SFDR, reflecting the fact that they do not manufacture or manage sustainability-related products or make them available to investors. And, although there had been discussion, the definition of a ‘financial product’ was not amended to include bonds and structured products.

The proposed amendments include (i) the removal of entity-level disclosures (particularly where FMPs were required to publish information about where they had considered principal adverse impacts (“PAIs”) of investment decisions on sustainability factors; (ii) a reduction in product-level disclosures; and (iii) the introduction of category labels for funds. We look at the changes below in a little more detail and consider how this might affect market participants.

• Removal of entity-level disclosures. Entities would no longer have to publish and maintain information about how they consider PAIs of investment decisions on sustainability factors.
• Significant reduction of product-level disclosures. Disclosure for investors would be shortened and simplified, reducing the number of topics covered. The disclosure will be amended to take into account the new product categories and would “rely on clear, measurable and usable concepts”. PAI indicators at product-level will be reduced and aligned with the Corporate Sustainability Reporting Directive (“CSRD”) at a later date. The proposed omnibus simplification package may influence the end point for the SFDR as amendments in scope and thresholds in the CSRD may mean less information is available for investors needing to comply with SFDR. Many investors were relying on the CSRD to provide information on value chain. In addition, with the likely removal of requirements for transition plans, SFDR compliant funds which rely on data about alignment with transition pathways and climate change scenarios may find it more difficult to obtain relevant data. However, this may be remedied as part of the simplification of topics and metrics under the SFDR review.
• New categorisation system. Three new categories would be introduced based on existing market practice and the existing legislative framework (including the ESMA Guidelines on funds’ names and the Commission 2023 Recommendation on transition finance). The intention is to enable investors to match their sustainability-related ambition with investments which match their sustainability preferences. The definition of ‘sustainable investment’ would be deleted as it has led to diverse interpretations and implementation challenges in practice.

The Commission’s new FAQ on the proposed changes to the SFDR (the “FAQs”) explain how the complex disclosure requirements under SFDR would be deleted as they have caused uncertainty and issues of mis-selling and misuse of disclosure as labels.

The new SFDR categories/labels

The categories have two main criteria: (i) exclusions – products cannot invest in investments which are incompatible with that category and (ii) positive contribution – at least 70% of the portfolio must follow the ESG strategy linked to the claims made by the product.

We note that, in relation to each of the categories above, the exclusions set out do not apply to use of proceeds instruments issued under Article 3 of the EU Green Bond Standard Regulation or where the use of proceeds of such bonds do not fund underlying excluded activities.

The Commission will be empowered to develop a limited set of implementing rules to supplement the key elements with more technical requirements.

AIFs no longer excluded

In a previous leaked version of the proposed amendments an opt-out for alternative investment funds (AIFs) was included, recognising that they are marketed exclusively to professional investors, but this opt-out was not included in the official published draft.

Fund Names and Marketing

Only products complying with the category criteria will be allowed to make ESG claims in their names and marketing documents, with the exception of non-categorised products under Article 9a of the SFDR that would be able to make such claims in marketing communications but not their names, subject to meeting conditions.

More protection for consumers against greenwashing

Use of Articles 8 and 9 of the current SFDR as a de facto sustainability labelling regime has led to confusion as there are no common criteria for investors to compare relative ESG performance of funds. Retail investors, in particular, often assume that Article 9 funds are fully sustainable and that Article 8 funds strongly integrate ESG factors though the SFDR does not require this. The requirements for minimum levels of alignment in labelled funds will help this.

Provisions have also been included in the draft which minimise ‘gold-plating’ by national authorities to lessen market fragmentation due to divergent requirements across the EU.

EU Taxonomy-alignment

The revised SFDR allows for financial products to use the EU Taxonomy in a voluntary way. Where Sustainable and Transition products have 15% or more invested in Taxonomy-aligned assets, the product will be considered to have complied with the 70% positive contribution criterion for the sustainable and transition categories (this threshold will be reviewed at a later date). The FAQs state that these “products would still need to apply the exclusions mandated under the category they wish to comply with on the portion of the portfolio that is not aligned with the EU Taxonomy, as well as the requirement to identify and disclose the adverse impacts their investments might have on other sustainability factors, and any actions taken to address them”.

The proposal also envisages that products replicating or managed in reference to the EU Climate Benchmarks will also qualify for compliance with the exclusions without having to disclose adverse impacts of their investments.

Timing

This is just the beginning of the legislative process, as now trilogue discussions between legislative bodies will begin and the Council and Parliament will need to adopt their negotiating positions. The Commission’s proposal indicates that the proposed regulation will apply 18 months after it enters into force (which is 20 days after publication in the Official Journal). The agreement of the text may take some time especially given the omnibus simplification work which is happening in parallel with the SFDR review. There will be transitional provisions for 12 months after the date of application of the amending regulation.

There are still inconsistencies which will need to be reviewed – we expect that much of this will be resolved in Level 2 text (the delegated regulation which will replace the SFDR RTS) but given the de-prioritisation of Level 2 acts discussed in this article, it is unclear when these will be available.

Our global Sustainable Finance & Investment group brings together a multidisciplinary global team that provides clients with best-in-market support. We are following developments relating to ESG regulation, so please get in touch if you would like to discuss.

Stay ahead with timely curated developments, insights and thought leadership on ESG regulation with our ESG Regulatory Alerts tool.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Rita Hunter, Emily Julier, Julia Cripps, Lena Markert and Jochen Seitz.