SFDR 2.0: Regulation Update

Following the leaked draft of the European Commission’s proposal for the revised SFDR 2.0, the formal publication has now been made available and the ESG regulatory landscape can expect some significant change over the next few years.

The current Sustainable Finance Disclosure Regulation (SFDR) is a European regulation that requires financial market participants (FMPs) and advisors to transparently disclose how they integrate sustainability risks and environmental, social, and governance (ESG) factors into investment decisions and advice. Under the original requirements, firms must classify their products as either promoting sustainability (Article 8), having sustainable investment objectives (Article 9), or not targeting sustainability (Article 6), and provide detailed disclosures about their approach to adverse impacts and ESG risks.

Why is SFDR changing?

Since its introduction in 2021, criticism of SFDR has been consistent, with many financial market participants citing difficulty in data availability, time and resource intensity, as well as lack of clarity regarding what constitutes ‘sustainable investment’. Inadvertently, the Article 8 and 9 regime has become an informal labelling system, negating the original intention of the regulation. SFDR 2.0 has sought to address these issues, and European regulators have consulted extensively on the proposed changes since 2023.

What are the key changes?

What’s staying?	Sustainability risk management disclosure at both entity and product level Pre-contractual and periodic disclosures in line with criteria for new product categories Contrary to the SFDR 2.0 leak, there will be no opt-out for Alternative Investment Funds (AIFs) made available exclusively to professional investors
What’s new?	New product categories (Article 7:Transition, Article 8: ESG Basics, Article 9: Sustainable, Article 9a: Combined Approaches) Minimum exclusions Minimum threshold of investments aligned with product category criteria (70%) Inclusion of impact investing
What’s out?	Existing product categories (Non-ESG, promotion of environmental and/or social, sustainable objective) Principal Adverse Impact (PAI) reporting at entity-level Definition of ‘sustainable investment’ Concept of ‘Do No Significant Harm’ (DNSH) Portfolio managers and financial advisers now exempt Sustainability risks in remuneration policies Taxonomy for ESG Basics product category Closed-ended products created and distributed before SFDR 2.0 implementation are exempt

What are the new product categories?

One of the biggest changes for asset managers will be the removal of Article 8/9 products, replaced with three new mandatory product categories (Article 7/8/9) and one mixed-use category (Article 9a). Under SFDR 2.0, all product categories are subject to a minimum 70% alignment, as well as adherence to a set of minimum exclusions in non-sustainable sectors or activities. There will still be an Article 6 category, now referred to as Article 6a which is for other funds not falling into any of new Articles 7,8 or 9 categories.

Transition products (Article 7) must have at least 70% of investments dedicated to a defined and measured transition objective.
ESG Basics products (Article 8) must apply ESG factors as part of their investment strategy, but do not need to demonstrate a sustainability objective.
Sustainable products (Article 9) will remain the most ambitious category and must have an environmental or social objective.
Combined approach products (Article 9a) must meet the 70% threshold for any of Article 7, 8 or 9, with the remaining 30% of investments diversified amongst two or more of the new categories

What is in scope of SFDR 2.0?

Under SFDR 2.0, the following financial products will still be in scope and required to comply with the regulation upon implementation. Contrary to the SFDR 2.0 leak, there will be no exemption for funds made available exclusively to professional investors.

All EU domiciled funds (AIF/UCITS/ELTIF)
Non-EU funds marketed into the EU (NPPR)
Insurance-based investment products (IBIPs)
Pension products and schemes

What are the exemptions?

The proposed changes outlined in SFDR 2.0 represent a significant reduction of scope in financial market participants required to comply with the regulation.

Portfolio management services (provided by investment firms or credit institutions) will no longer be caught by SFDR
Investment advisers will no longer be caught by SFDR
If closed to new investment before SFDR 2.0 is made effective, closed-ended funds would also be out of scope

How does it affect me?

With the change to product category criteria, it is possible that achieving these new product categories could be much harder. It is also unclear whether a grandfathering period will be introduced to allow existing funds to adjust to SFDR 2.0. This could prove difficult for asset managers as current Article 8 or 9 funds may not meet the criteria for the new product categories. We are at the beginning of the EU legislative process, but the published text is not currently law and it could be 2027/2028 before it comes into law. However, asset managers and other FMPs should start thinking now about how current Article 6,8 and 9 funds will map into the new product categories under SFDR 2.0.

Where can I find support to navigate SFDR 2.0?

JTC’s Sustainability Services team offers expert guidance to help clients navigate SFDR requirements, including the latest updates, which we believe represent a significant change for the industry. With deep regulatory knowledge, we provide practical support for ESG reporting and product classification, ensuring compliance and strengthening your sustainability strategy.

Find out more about our Sustainability & Impact Services