The European Commission has published a proposal to update the Sustainable Finance Disclosure Regulation (SFDR). 

The proposal seeks to reduce complexity and make sustainability disclosures more comparable across products. Following months of stakeholder feedback, it focuses on resolving three recurring implementation challenges: complexity, inconsistent interpretation, and investor confusion.

SFDR 2.0 proposes three key changes:

1. A new product categorisation system
2. Simplified product-level disclosures
3. Removal of entity-level disclosures (including entity-level PAIs)

In this article, we unpack the proposal by explaining the three key changes, what happens next, and how firms can begin preparing for the potential changes. 

Quick recap of how SFDR has been used in practice

SFDR sets out sustainability-related disclosure requirements for financial market participants at both product level (e.g., fund disclosures) and entity level (firm-wide disclosures). 

Over time, references to Articles 6, 8 and 9 have also been used by market participants as shorthand to describe a product’s sustainability profile. While this shorthand can be practical, it has not always been applied consistently across the market. This is one of the reasons policymakers have explored ways to improve clarity and comparability.

New product categorization system (clearer ‘buckets’ for funds)

The three core categories

The proposal introduces a revised categorisation approach intended to reflect a product’s sustainability ambition more directly:

Transition (Article 7)

• Products investing in companies and/or projects that are not yet sustainable, but are on a credible transition pathway, or where the investments contribute to measurable improvements in climate, environmental, or social outcomes. 
• Example - a fund that invests in higher-emitting companies (like utilities, steel or cement) only where there is a credible plan to cut emissions, and track measurable progress over time.

ESG Basics (Article 8)

• Products that apply sustainable approaches but do not meet the criteria for the Sustainable or Transition categories. 
• Example - a fund that avoids investing in coal, tobacco and controversial weapons, and has a preference for higher-rated ESG companies so the portfolio scores better than its benchmark on ESG.

Sustainable (Article 9)

• Products contributing to environmental or social objectives, typically through investments in companies or projects that already meet high sustainability standards
• Example - a fund that invests mainly in companies aligned with a clear environmental or social goal, such as renewables, energy efficiency or affordable housing.

In addition, the proposal would remove the current definition of “sustainable investment” under SFDR, which has been interpreted differently across the market and has created implementation challenges in practice.

The “anchors” behind the categories: where the proposal becomes more rule-based

Each category would be grounded, at a minimum, in two requirements:

• Mandatory exclusions, calibrated by category
• A minimum 70% alignment threshold: at least 70% of assets should align with the product’s chosen category and stated sustainability strategy

Overall, this is intended to reduce reliance on broad narrative positioning and support clearer, more comparable criteria.

Two additional designations (for products that won’t fit neatly)

The proposal also recognises that some products may not fit a single category or may not meet the 70% threshold:

• Article 6a - Other Products - Products that do not meet the 70% threshold may still make sustainability-related disclosures, but would be subject to strict naming and marketing rules, and could not present themselves as belonging to the three core categories.
  
  
• Article 9a - Blended Products mechanism (not a category) - A mechanism intended for portfolios that combine exposures across Sustainable, ESG Basics, and Transition. It would allow classification of multi-asset or blended products, provided the underlying sustainability exposures are mapped transparently.

Simplified product disclosures (shorter, clearer, more comparable)

A long-standing implementation challenge under SFDR is that product disclosures can become dense and difficult to compare across products. The proposal aims to streamline product templates by:

• Making disclosures shorter and clearer
• Reducing the number of topics and indicators
• Aligning disclosures more closely to the new categorisation system
• Prioritizing information that is measurable, decision-useful, and relevant for investment decisions

The objective is to improve comparability in practice and focus disclosures on what helps investors understand a product’s sustainability approach and constraints.

Removal of entity-level disclosures (including entity-level PAIs)

The proposal would remove entity-level disclosure requirements under SFDR. This includes eliminating:

• The obligation to publish Principal Adverse Impacts (PAIs) at entity level under Article 4
• The associated entity-level templates

If adopted, this would reduce firm-wide SFDR reporting requirements and place greater emphasis on product categorisation and product-level disclosures.

What happens next and what firms can do now

The proposal now moves to the European Parliament and the Council for negotiation. If adopted, the revised framework would apply 18 months after entry into force (beginning of 2028 as the earliest expected implementation).

In the meantime, firms can start preparing by:

• Checking where each fund would sit under the proposed categories (including whether it could credibly meet the 70% threshold) and what data would be needed to support that.
  
  
• Reviewing exclusions and how they’re applied in practice; not just the policy on paper, but how those rules are checked and monitored in the portfolio.
  
  
• Making sure product communications are aligned, including fund naming, marketing language, and how any mixed/blended exposure would be explained clearly and consistently.

If you want to learn more about how this could affect your firm or disclosure, we’d love to help.

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