SFDR 2.0

February 2026

Following industry engagement, the European Commission has proposed significant, wide-ranging amendments to the Sustainable Finance Disclosure Regulation (SFDR) which has applied since March 2021.

The proposals aim to simplify the regime, improve how it works in practice and reduce costs for firms. While the changes are likely to result in a more proportionate and clearer regime, significant efforts will be required by most market participants to transition to the new requirements.

The Commission proposes to streamline disclosure requirements and to make information clearer and more decision-usable for investors.

The main changes are:

• Product categories: The existing Article 8 and Article 9 classifications would be replaced with three new categories. Each category would have a 70% investment threshold that would need to be held in line with a binding investment strategy and measured using appropriate sustainability-related indicators:
  • Article 7 — Transition products — investments meeting a clear and measurable transition objective related to sustainability factors.
  • Article 8 — ESG basics — investments integrating sustainability factors.
  • Article 9 — Sustainable features — investments meeting a clear and measurable objective related to sustainability factors, including environmental and social objectives.

Products would need to meet several qualifying criteria for each category and comply with mandatory exclusions. Some exemptions to the 70% threshold would be available (covered in a table later in this article).

A new ‘combined’ category (Article 9a) would be introduced for products that invest in a mixture of other products. In addition, ‘impact’ strategies would be recognised as being compatible with Article 7 or Article 9 products.

• Marketing restrictions for uncategorised products (Article 6a): Disclosure restrictions would be introduced for products that do not qualify for one of the categories mentioned above. Amongst other requirements, these products would not be able to include sustainability-related claims in their names and marketing communications that are reserved for categorised products, and information on sustainability considerations would not be permitted to be a “central element” of a product’s pre-contractual disclosures.
• Scope: Portfolio management services and investment advice would be removed from the scope of SFDR.
• Disclosures: Entity-level website disclosures, including on principle adverse impacts (PAI), would be removed. However, product-level disclosures would still be required. The disclosures for the revised product categories would be designated in new regulatory technical standards.
• Exemptions: Closed-ended products that exist before the regulation enters into force will be exempt. Some market participants will be disappointed that an exemption for AIFs marketed to professionals that was previously included in a draft proposal did not make it into the final version.

The updated regime is unlikely to come into force until 2027 or 2028 due to the time required for the European Council and Parliament to reach agreement, followed by trilogue negotiations and agreement of final rules.

Once the revised regulation enters into force (at the earliest in 2027 or 2028) there will be an 18-month transition period before it takes effect.

The Commission’s fundamental overhaul of SFDR appears to be a tacit acknowledgment that the original framework was flawed. However, as market participants have dedicated considerable efforts implementing the original regime, including frequent product reclassifications as regulatory expectations changed, the proposed changes will need to be weighed carefully against the potential benefits.

Some of the changes are likely to be welcomed by the industry — particularly the removal of PAI reporting and disapplying the regime from advice and portfolio management. However, the higher bar set by the new categories coupled with stringent marketing restrictions for unclassified products could require material changes to existing product suites.

Firms will have the following challenges front of mind as they consider the Commission’s proposals:

• Strategic product reclassification: the most impactful decisions will relate to product classification. Firms will face fundamental decisions around how to reclassify existing Article 8 and 9 products under the new categories. Careful consideration will be needed around products’ compatibility with the new categories and whether uplifts are desirable considering new thresholds and requirements. For example, we anticipate that some changes would be needed for many current Article 8 products to fit under the new ‘ESG basics’ category.
• Operational alignment with the new categories: existing processes for assessing an issuer’s eligibility for an SFDR fund will need to be aligned to the new categories (for example the sustainable investment framework), which could imply significant operational changes alongside changes to fund offering documents and investor notifications.
• Marketing and disclosure restrictions: where products do not qualify for one of the new categories, a thorough review will be required to ensure they are compatible with the new Article 6a restrictions. Managers will need to ensure that marketing materials and disclosures are properly screened and controlled.
• Disclosures and investor notification: when amending existing products, managers will need to account for updates to associated product-level reporting requirements. The changes are likely to result in wholesale updates to product offering documents and other disclosures, and may require investor notification. This is likely to be operationally burdensome.

The proposed revisions come at a time when the growth and competitiveness agenda is front and centre for EU authorities. SFDR 2.0 is framed as supporting the Savings and Investments Union, a project which aims to deepen EU capital markets and enhance global competitiveness (see a summary here).

At the same time, the industry’s ESG appetite itself has waned somewhat after years of enthusiasm.

In many respects, the Commission’s proposals move the SFDR closer towards the UK’s Sustainability Disclosure Requirements (SDR – see an overview here). Although the new categories are not explicitly “labels” as under the SDR, they are similar in that they introduce minimum thresholds and more stringent criteria than the existing SFDR regime. While the 70% investment threshold would be helpfully aligned between SDR and SFDR, the SFDR proposals are inconsistent with ESMA’s fund name guidelines (where certain 80% thresholds are in play). See a comparison of the two regimes below:

For more on sustainability-related developments around the world see chapter six of KPMG International’s latest Evolving Asset Management Regulation report here.