EXECUTIVE SUMMARY
The SFDR sets baseline sustainability-risk disclosures under Article 6 for all in-scope products, with additional disclosures under Articles 8 and 9 according to their characteristics and objectives. A proposed SFDR 2.0 overhaul (Commission proposal published 20 November 2025, following consultations in 2023–2024 and a call for evidence in May 2025) would replace this system with new product categories (Transition, ESG Basics, and Sustainable), each with minimum quantitative thresholds. Financial institutions should continue complying with current SFDR requirements while assessing the proposed structural changes. Their final form and application dates remain subject to the legislative process.
What Is the SFDR
The Sustainable Finance Disclosure Regulation, Regulation (EU) 2019/2088, is the EU's transparency framework requiring financial market participants (FMPs) and financial advisers (FAs) to disclose how they integrate sustainability risks, consider adverse sustainability impacts, and provide sustainability-related information about their financial products. It has been in application since March 2021, with the Regulatory Technical Standards (RTS) applying from 1 January 2023.
The SFDR applies to all EU FMPs and financial advisers, including asset managers (UCITS and AIFM), insurance companies offering investment products, pension providers, investment firms providing portfolio management, and credit institutions providing portfolio management. It may also capture non-EU firms marketing products in the EU in certain circumstances: for example, non-EU AIFMs marketing under national private placement regimes. The precise scope depends on the regulatory framework under which the firm accesses the EU market.
Since its introduction, the SFDR has effectively become the EU's de facto labelling system for sustainable financial products, despite never being designed as one. According to the European Commission’s November 2025 SFDR review, almost 50% of EU assets under management are in Article 8 or 9 products, representing over 60% of EU funds. At the end of 2025, Europe held about 86% of assets in Morningstar’s global sustainable open-end fund and ETF universe, according to its February 2026 report. Morningstar’s definition is distinct from SFDR classifications. We suggest making the basis for each product’s sustainability claims clear in its disclosures and investor communications.
Current Requirements (SFDR 1.0)
The current SFDR imposes disclosure obligations at two levels: entity level (the firm) and product level (each financial product). The disclosures are organised around three pillars:
1. Principal Adverse Impacts (PAI): entity level
Article 4 requires the entity-level PAI statement for FMPs exceeding an average of 500 employees during the financial year, and for qualifying parent undertakings of large groups exceeding that threshold on a consolidated basis. Other FMPs follow the consider-or-explain approach. Where a PAI statement is required or chosen, publish it on the website and update it annually by 30 June. Annex I includes 18 mandatory indicators for investee companies, with separate indicators for sovereigns and real estate where relevant. A PAI statement also includes at least one additional climate or environment indicator and at least one additional social, employee, human-rights, anti-corruption or anti-bribery indicator, selected under the RTS methodology.
2. Sustainability risk integration: entity and product level
Under Article 3, firms must publish policies on the integration of sustainability risks into their investment decision-making process. Under Article 5, remuneration policies must be consistent with sustainability risk integration.
3. Product-level disclosures: Articles 6, 8, and 9
Market shorthand often separates Article 6, Article 8 and Article 9 products, but Article 6 requirements also apply to products making Article 8 or Article 9 disclosures:
| Article | Description | Disclosure requirements |
|---|---|---|
| Article 6 | Baseline requirements for all in-scope products. “Article 6 product” is also market shorthand for a product outside Articles 8 and 9 | Disclose sustainability-risk integration and likely impacts on returns, or explain why risks are not relevant. Article 8, Article 9 and other applicable provisions can impose additional disclosures. |
| Article 8 | Products that promote environmental or social characteristics (among other characteristics), provided the investee companies follow good governance practices | Pre-contractual, website, and periodic disclosures per the RTS. Must explain how the product meets its promoted characteristics. If the product makes sustainable investments, must apply the Article 2(17) definition including the "do no significant harm" (DNSH) test. |
| Article 9 | Products that have sustainable investment as their objective | Full pre-contractual, website, and periodic disclosures. Must explain how the sustainable investment objective is attained. The product must have sustainable investment as its objective, and substantially all investments must qualify as "sustainable investments" under Article 2(17), subject to DNSH and good governance requirements. ESMA Q&A confirms that limited allocations for hedging, liquidity, and cash management purposes are permissible. |
What the SFDR 2.0 proposal would change
On 20 November 2025, the Commission published its proposal to amend Regulation (EU) 2019/2088 (SFDR) and repeal the SFDR Delegated Regulation (EU) 2022/1288 (the RTS). While the changes are structural, the legislative form is an amendment to the existing regulation, not a standalone replacement. The proposal responds to widespread evidence that the current framework has become overly complex, that the Article 6/8/9 distinction functions as an unintended labelling system, and that disclosures are too long and technical for retail investors to use effectively.
SFDR 1.0 (current, in force)
- Disclosure-based regime (Articles 6, 8, 9)
- "Sustainable investment" definition (Art. 2(17)) with DNSH and good governance
- Entity-level PAI reporting (Art. 4)
- Remuneration policy disclosure (Art. 5)
- Portfolio management and financial advice in scope
- No general SFDR product-category threshold. Separate fund-name rules may apply
- Separate ESMA fund-name exclusion criteria may apply
SFDR 2.0 (Nov 2025 proposal, not yet adopted)
- Product categorisation regime (3 new labels)
- "Sustainable investment" definition removed
- Entity-level PAI removed
- Remuneration disclosure removed
- Portfolio management and financial advice excluded from scope
- General 70% criterion, with specified alternative qualifying routes
- Mandatory exclusions (weapons, tobacco, fossil fuels, varying by category)
The three proposed product categories
The Commission's proposal introduces Transition, ESG Basics and Sustainable categories under proposed Articles 7, 8 and 9. It includes a general 70% contribution or integration criterion and category-specific exclusions, with alternative qualifying routes for Transition and Sustainable products. Non-categorised products are addressed by proposed Article 6a, which limits how sustainability information is presented.
| Category | Proposed Article | Key requirements |
|---|---|---|
| Transition | Article 7 | At least 70% of assets invested in activities credibly transitioning toward sustainability. Must disclose Taxonomy alignment. Product-level PAI disclosure required. Mandatory exclusions apply. |
| ESG Basics | Article 8 | General 70% integration criterion and category-specific exclusions. The Commission's proposed Article 8 does not impose the same explicit product-level PAI duty as its Transition and Sustainable categories. |
| Sustainable | Article 9 | At least 70% of assets invested according to a pre-defined sustainability strategy. Must disclose Taxonomy alignment. Product-level PAI disclosure required. Broadest exclusions. Additional impact-specific disclosures apply where the product also claims an impact objective. |
In the Commission's proposal, Transition and Sustainable products can meet the contribution criterion through at least 15% Taxonomy-aligned investment. The remaining conditions still apply. Negotiating positions may change these routes and the associated disclosures.
What the proposal would remove
- "Sustainable investment" definition (Article 2(17)): the concept that underpinned Article 8 (dark green type) and Article 9 classification, including the DNSH principle and good governance test, is removed entirely. Category integrity is instead based on minimum investment thresholds and mandatory exclusions.
- Entity-level PAI reporting (Article 4): the requirement for firms to publish entity-level principal adverse impact statements is deleted, reducing administrative burden and addressing overlap with CSRD. Product-level PAI disclosures are retained for Transition (Art. 7) and Sustainable (Art. 9) products.
- Remuneration policy disclosure (Article 5): the requirement to align remuneration with sustainability risk integration is removed.
- Portfolio management and financial advice: investment firms and credit institutions providing portfolio management, and financial advisers providing investment advice, are excluded from the scope of SFDR 2.0.
Interaction with CSRD, ESRS, and the Broader Sustainability Framework
The SFDR 2.0 proposal is explicitly designed to reduce overlap with the CSRD and align data requirements with the simplified ESRS. Specifically:
- The removal of entity-level PAI reporting responds to the overlap between SFDR entity-level disclosures and CSRD sustainability statements. The Commission's view is that corporate-level sustainability information should flow through the CSRD, not be duplicated at the fund manager level.
- Product-level SFDR disclosures under SFDR 2.0 are designed to reference fewer data points and to align with data available under the simplified ESRS, reducing the gap between what investee companies report and what fund managers need to disclose.
- EU Taxonomy alignment disclosures are retained but streamlined: only Transition (Art. 7) and Sustainable (Art. 9) products pursuing environmental objectives must disclose Taxonomy alignment.
- The broader Omnibus I simplification of CSRD (generally narrowing the EU-company scope to more than 1,000 employees and net annual turnover above EUR 450 million) has implications for SFDR data availability: with fewer companies reporting under the ESRS, financial institutions may face data gaps for investee companies that fall out of CSRD scope. The Commission is reviewing EU Taxonomy disclosure rules to address this.
Timeline: What Happens When
The current SFDR remains fully in force. Annual PAI reporting (by 30 June) and product-level disclosures continue as normal. The SFDR revision is under negotiation. No final application date has been fixed.
- March 2021: SFDR entered into application
- 1 January 2023: RTS (Delegated Regulation (EU) 2022/1288) applicable
- 20 November 2025: Commission publishes SFDR 2.0 proposal
- 24 June 2026: Council agrees its negotiating mandate.
- 7 October 2026: Parliament confirms the decision to enter interinstitutional negotiations.
- Final adoption, entry into force and application: dates depend on the agreed legislation. The Commission proposed application 18 months after entry into force. This is not a fixed calendar deadline.
Prepare your product range for the SFDR transition
Tell us what you are working on. We reply within two working days.
How to prepare
Step 1: Continue full SFDR 1.0 compliance
The current SFDR remains in force. Do not reduce disclosure efforts in anticipation of SFDR 2.0. PAI reporting, pre-contractual disclosures, website disclosures, and periodic reporting for Article 8 and Article 9 products must continue on the existing schedule.
Step 2: Map your product range to the proposed categories
Assess how each existing Article 8 and Article 9 product would map to the proposed Transition (Art. 7), ESG Basics (Art. 8) or Sustainable (Art. 9) categories. For each product, check the contribution or integration criteria, any specified alternative route and the mandatory exclusions. Record where the current strategy fits, where information is missing and what would need to change. This gives product, investment and compliance teams a shared basis for reviewing the options.
Step 3: Assess data availability under the simplified CSRD/ESRS
The Omnibus I narrowing of CSRD scope means fewer investee companies will be subject to mandatory sustainability reporting. Identify which portfolio companies fall out of the revised CSRD scope and assess the implications for your SFDR product-level disclosures. Consider alternative data sources (ISSB-aligned disclosures, voluntary VSME reporting, third-party ESG data providers) to fill potential gaps.
Step 4: Review exclusion policies
Each proposed SFDR 2.0 category has mandatory exclusions (weapons, tobacco, fossil fuels, with varying thresholds by category). Review your current exclusion policies against the proposed requirements and identify any products that would need portfolio adjustments.
Step 5: Monitor the legislative process
Track the Parliament and Council positions as negotiations progress. The final text may differ from the Commission’s proposal. The leaked November 2025 draft, for example, differed from the published version on the professional-investor-only fund exemption. We suggest recording the assumptions used in product mapping and identifying which decisions will need to be revisited when the final requirements are agreed.
Frequently Asked Questions
Conclusion
The proposal would change how sustainable financial products are categorised and disclosed. It would introduce investment thresholds and exclusions, while changing several current disclosure requirements. Those changes remain under negotiation. Firms need to maintain their current disclosures while assessing what the proposal could mean for their products.
We suggest starting with the product range and the information needed to support it. Map the proposed categories, identify data gaps and record the assumptions behind any planned changes. The final text and application provisions will determine which changes are required and when.
Disclaimer: This article is intended as a practical orientation guide, not legal or investment advice. It reflects information available as of mid-March 2026. This article discusses the Commission's November 2025 proposal. The Council agreed its negotiating mandate on 24 June 2026 and Parliament confirmed its decision to enter interinstitutional negotiations on 7 October 2026. Neither step is final adoption of the amended regulation. Key uncertainties include: the final product category definitions, minimum thresholds, and exclusion criteria; the scope of entities subject to the new regulation; the application timeline; and the availability of transition relief. The current SFDR (Regulation (EU) 2019/2088) remains fully in force. Readers should verify all compliance-critical obligations against the authoritative legal text on EUR-Lex and seek qualified legal counsel before making compliance or product structuring decisions.