EU SFDR 2.0 - An investment solution perspective

In November, the European Commission published its proposal to amend the existing EU Sustainable Finance Disclosure Regulation (SFDR) with the goal of simplifying current transparency rules. As readers will recall, the original aims of SFDR were to enhance transparency and comparability across sustainable investment solutions, combat greenwashing, and build investor confidence. These objectives were intended to help channel private capital toward sustainable investments, supporting the EU’s ambition to green the economy by 2050.

As part of the original legislation, a review process was foreseen. In line with this, the EU has assessed the current SFDR framework in consultation with the investment industry. Feedback from financial market participants highlighted the need to move away from a purely disclosure-based regime toward a categorisation and label-oriented approach. Stakeholders also raised concerns about complexity and the associated costs of meeting existing disclosure requirements.

The EU Commission states that “The changes are designed to address current shortcomings, making the rules simpler, more efficient, and better aligned with market realities. The revised rules will be more retail friendly and usable for companies.”

The proposal addresses several areas, including entity-level disclosures, product categorisation and related disclosures, as well as a revised scope of the regulation. This article focuses on the key implications for fund-based investment solutions, summarised in Figure 1 below.

The main takeaways from a fund solution perspective are:

• Shift from Pure Disclosure to Categorisation with Disclosure
  • The proposal moves beyond disclosure-only requirements by introducing clear product categories combined with streamlined disclosures.
  • The European Commission observed that existing Article classifications had unintentionally become labels, creating greenwashing risks—something the EU aims to prevent.
  • Disclosure will remain but in a simplified format, aligned with the new categorisation framework.
• Introduction of four product categories
  • Article 6 – Not categorised: No ESG or sustainability integration
  • Article 7 – Transition category
  • Article 8 – ESG basics category
  • Article 9 – Sustainable category
  • Under the proposal, the existing Article 8 and Article 9 classifications will be eliminated. All funds currently classified under these articles will need to be reassessed to determine how they align with the new categorisation framework.
• New criteria for asset allocation and baseline exclusions
  • For the first time, minimum asset allocation thresholds and baseline exclusions are proposed.
  • A minimum of 70% of assets must align with the objectives of the chosen category.
  • Baseline exclusions will follow standards set by the EU Climate Transition Benchmark (CTB) and EU Paris-Aligned Benchmark (PAB).
  • This approach is broadly consistent with the ESMA Fund Naming Guidelines introduced in May, which require:
    • 80% asset allocation threshold (vs. 70% under SFDR 2.0)
    • Exclusions aligned with EU CTB and EU PAB criteria.
• Introduction of permitted investments
  • For the first time, guidance is provided on what types of investments are consistent with each product category.
  • This aims to improve consistency of approach, comparability, and transparency across the market.
  • Permitted investments differ by category, reflecting their respective objectives.
• Removal of the current sustainable investment definition and the ‘Do No Significant Harm’ principle
  • The existing definition of Sustainable Investment under Article 2(17) will be removed due to its broad interpretation and inconsistent application.
  • New, clearer criteria will apply to the proposed Article 9 sustainable category.
  • The ‘Do No Significant Harm’ principle will be replaced by baseline exclusions focused on key social and environmental themes.
• Introduction of a ‘combination’ subcategory
  • A new subcategory will cover investment solutions, typically fund-of-funds, that combine allocations from the Transition, ESG Basics, and Sustainable categories, as well as non-categorized solutions.
  • These products must disclose the underlying allocation to each category.
  • Example disclosure format:
    • w% Article 6 – Not Categorised (No ESG/Sustainability integration)
    • x% Article 7 – Transition Category
    • y% Article 8 – ESG Basics Category
    • z% Article 9 – Sustainable Category
• Introduction of an ‘Impact’ subcategory
  • The Impact subcategory add on is available only to Transition and Sustainable categorised solutions.
  • Products using this designation must have a stated environmental or social objective that is predefined, positive, and measurable.
  • Additional disclosures are required, detailing the specific impacts and the methodology for measuring them.

Figure 1: Proposed changes to fund based investment solutions under EU SFDR

• EU SFDR 2.0 and European defence
  • A recent area of discussion has been Europe’s defence and rearmament. The EU SFDR 2.0 proposal specifically addresses controversial weapons, defined by the EU as landmines, cluster munitions, chemical weapons, and biological weapons.
  • The proposal does not restrict investment in conventional military equipment, which aligns with the EU’s broader objective of strengthening defence capabilities following the Russian invasion of Ukraine.

We will continue to keep our clients informed as regulatory updates and technical guidance emerges during 2026.