By streamlining requirements and aligning more closely with instruments such as the CSRD and the EU Climate Benchmarks, SFDR 2.0 aims to deliver greater clarity, comparability and regulatory coherence across the sustainable finance landscape.
Why Was Reform Needed?
SFDR’s original disclosure categories of Article 8 and 9 were not designed as sustainability labels but quickly came to function as such in practice. This led to inconsistent supervisory expectations, differing interpretations across Member States and heavy reliance on Principal Adverse Impact (PAI) indicators for Do No Significant Harm (DNSH) assessments. The new proposal addresses the shortcomings of the current regime by setting clearer standards for what sustainability-related investment products must demonstrate and by removing some reporting obligations that are already covered under other EU legislation.
An investment product in this context refers to regulated offerings, such as investment funds, pension products, and insurance-based investment products, that are made available to investors under EU sectoral legislation.
The New Product Categories
| Category |
Transition (art. 7) |
ESG Basics (Art. 8) |
Sustainable (Art. 9) |
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Main differences
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- Requires a transition objective with a 70% allocation to transition-aligned investments.
- Applies strict fossil-fuel and coal exclusions, plus transition-specific criteria (e.g., credible transition plans, science-based targets).
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• Requires integration of sustainability factors beyond risk management, but no sustainability or transition objective.
• Applies baseline exclusions only, with no specific transition or sustainability KPIs.
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• Requires a sustainability objective with a 70% allocation to sustainable investments.
• Applies full climate-benchmark and taxonomy-related exclusions, the strictest of all categories.
|
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Main similarities
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• All require 70% of assets to meet the category’s core criteria
• All must use appropriate sustainability-related indicators to measure progress and compliance.
• Impact Add-on allowed
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• All require 70% of assets to meet the category’s core criteria.
• All must use appropriate sustainability-related indicators to measure progress and compliance.
|
• All require 70% of assets to meet the category’s core criteria
• All must use appropriate sustainability-related indicators to measure progress and compliance.
• Impact Add-on allowed.
|
Sustainability Products
Article 9 is the category with the highest level of sustainability ambition. It sets the rules for financial products that claim to invest in, or contribute to, sustainable activities or assets. These products must invest at least 70% of their assets in activities that support a clear and measurable environmental or social sustainability objective, using appropriate sustainability indicators. They must also apply strict exclusions based on the EU Climate Benchmark Regulation, including companies involved in fossil fuel expansion or without a credible coal phase-out plan. Products must identify and disclose the principal adverse impacts of their investments and explain how they address them.
The Regulation specifies which types of investments can count toward the sustainability objective, such as taxonomy-aligned activities, Paris-aligned benchmark portfolios, European Green Bond-aligned instruments and some social entrepreneurship investments, while allowing other investments if properly justified. Products must disclose their sustainability objective, the investment strategy used to meet it, the types and share of qualifying investments and the indicators used to measure progress.
Transition Products
Article 7 establishes a new category for financial products that aim to support companies or activities in achieving more sustainable environmental or social performance.
To use this designation, a product must invest at least 70% of its assets in activities that support a clear and measurable transition objective, and progress must be tracked using appropriate sustainability indicators. Products must also adhere to strict exclusion rules: they cannot invest in companies involved in the most harmful coal or fossil-fuel activities, or in firms developing new coal, lignite, oil, or gas projects. Unless they are investing through narrowly defined use-of-proceeds instruments that meet EU requirements.
Article 7 outlines what can contribute to the 70% threshold, including investments aligned with EU climate benchmarks, taxonomy-aligned and taxonomy-eligible activities, companies with credible transition plans or science-based targets, and structured engagement strategies with defined milestones and escalation actions. Products must clearly explain their transition objective, the types of investments they have chosen, any phase-in period, the indicators they use to measure progress, and how they address underperforming assets.
ESG Basics
Article 8 creates a new category for financial products that integrate sustainability factors in a meaningful way but do not pursue a transition or sustainability objective.
To use this designation, a product must invest at least 70% of its assets in line with the ESG approach set out in its binding investment strategy, using appropriate sustainability indicators to show how ESG factors are incorporated. Products in this category must also apply the standard exclusions drawn from the EU Climate Benchmark Regulation, with limited exceptions for certain use-of-proceeds bonds.
Article 8 outlines several types of investments that may contribute to the 70% threshold, including those that outperform their universe or benchmark in terms of ESG ratings or sustainability indicators, as well as investments in companies with demonstrably strong sustainability practices. Products must explain the sustainability factors they integrate, describe their ESG strategy, outline the mix of investments used to meet the threshold and disclose the indicators and data sources used to monitor progress.
Article 9a: a combination category
Article 9a outlines rules for financial products that invest in, or are composed of, other products classified under the Transition, ESG Basics, or Sustainable categories. A product may rely on these underlying categorised investments to meet the 70% threshold required under Articles 7, 8 or 9. It may use the disclosures of those underlying products when assessing eligibility and reporting. For non-categorised products that combine multiple underlying categorised products, Article 9a requires transparency on the composition of the product, including the share allocated to each category, any remaining assets that do not fall under a category, and the objectives and exclusions that apply to that portion.
The Impact Add-On
The Impact add-on is expressly recognised in Article 2(26) as a “sustainability-related financial product with impact” and applies only to Sustainable and Transition Products, not to ESG Basics. A financial product with impact is defined as one that has as its objective the generation of a pre-defined, positive and measurable environmental or social impact.
To qualify under SFDR 2.0 as “impact”:
- the product must demonstrate clear intentionality linked to a specified environmental or social objective;
- a pre-set impact theory must explain how the intended outcomes will be achieved;
- the impact must relate to measurable change in specific, pre-defined areas; and,
- reporting must cover actual, realised impact, including how the investments and the contribution of investors support that impact.
For example, where a transition product also claims to deliver impact, it must additionally define the intended environmental or social outcomes, set out a theory of change, and report on how its investments and the capital committed by investors contribute to achieving those outcomes.
This framework provides impact investing with a defined regulatory status within SFDR 2.0, ensuring that impact claims are substantiated through intentional design, credible pathways and demonstrable outcomes.
We also note that the earlier reference to a requirement to invest specifically in assets providing solutions to defined social or environmental challenges does not appear in the final proposal. This remains a point of tension regarding how impact investing is defined and understood within the European impact investing market. Further clarification on the regulatory treatment of solution-oriented investments will therefore be important as the Level 2 measures and final text are completed.
What Happens to Today’s Article 8 and 9 Funds Under SFDR 2.0?
Under SFDR 2.0, the current Article 8 and Article 9 classifications will be eliminated entirely, meaning that all products currently labelled under these classifications will need to be reassessed and reclassified under the new regime. Managers will have to determine whether a product genuinely meets the criteria for the Transition, ESG Basics, or Sustainable category, including the 70% threshold, mandatory exclusions and indicator-based measurement requirements.
Many existing Article 8 funds are likely to fall into the ESG Basics category unless they strengthen their approach to qualify for a transition or sustainability objective, while Article 9 funds will need to demonstrate that their strategies meet the substantially higher bar set for the Sustainable category. No grandfathering or automatic migration is foreseen; therefore, products must ensure that their objectives, investment strategies, data, and disclosures align with the selected category, particularly where they intend to make transition or impact-related claims, which carry additional obligations.
Key Structural Changes
Removal of Entity-Level PAI
Entity-level PAI disclosures are removed, as the CSRD already imposes detailed sustainability reporting obligations. This reduces duplication and redirects attention to product-level transparency.
Replacement of DNSH With Exclusion Lists
The DNSH requirement, previously reliant on PAI indicators, is replaced with standardised exclusion rules aligned with EU Climate Benchmarks. This provides a clearer and more objective safeguard system.
Space for Higher Ambition
SFDR 2.0 defines minimum regulatory standards. Firms may still choose to apply stricter internal criteria, use voluntary labels or adopt enhanced sustainability thresholds where desired.
Marketing and Naming Rules
SFDR 2.0 introduces clearer and more prescriptive rules on how sustainability-related terms may be used in fund names and marketing materials.
- Only products formally categorised under Article 7 (Transition), Article 8 (ESG Basics) or Article 9 (Sustainable) may use terms such as “sustainable”, “transition”, “impact”, “ESG” or similar expressions in their names or investor communications.
- The terminology must accurately reflect the product’s stated objectives and regulatory category. Products that fall outside the SFDR 2.0 categorisation system may still explain how they manage sustainability risks, but they are no longer permitted to make broader sustainability-related claims in marketing materials. These claims must be accompanied by periodic reporting on progress.
The proposal also introduces stricter and more prescriptive naming conditions than ESMA’s 2023 fund-naming guidelines, which will continue to apply only until SFDR 2.0 and its Level 2 measures take effect, at which point the new harmonised rules will replace the ESMA framework.
The Critical Role of Level 2
Although the SFDR 2.0 sets the high-level structure, practical implementation depends on the forthcoming Level 2 measures. These will specify important elements like:
- disclosure templates;
- category-specific indicators;
- final exclusion lists;
- methodologies for transition and reporting;
- the operation of the 70% sustainable/transition investment threshold; and,
- permitted use of benchmarks.
The regime will only become fully operational once these details are clarified.
Timelines for Adoption and Application
With the proposal published on 20 November 2025, adoption can realistically be expected around mid-2027, based on the average duration of the EU legislative process. The application would then follow around mid-2028. Certain products, such as insurance-based investment products and pension products, may receive extended phase-in periods. Level 2 measures will likely be finalised between adoption and application, leaving a relatively concentrated implementation window.
What Should the Market Do Now?
A multi-year transition period offers time for preparation, but organisations should begin early. A practical step is to start mapping current Article 8 and 9 products to the new product categories and assess whether their portfolios and investment processes can meet the applicable thresholds and exclusion rules.
Internal methodologies for sustainability, transition and impact strategies should be strengthened, with clearer definitions of objectives, indicators and reporting practices. Marketing and naming approaches should be reviewed now to avoid costly rebranding later. Data strategies may need updating, shifting focus away from PAI-heavy processes toward category-specific metrics. Governance should also adapt so that classification decisions under the new regime are consistent and well supported.
Launching Funds Before SFDR 2.0 Applies
Funds launched before the mid-2028 application date must comply with the current SFDR; however, they should already be designed with the future system in mind. This means avoiding exposures incompatible with upcoming exclusions, choosing names that will remain appropriate under SFDR 2.0 and building sustainability, transition or impact approaches capable of migrating into the new categories. It is advisable to include flexibility in fund documents to accommodate adjustments once Level 2 guidance becomes available. Even now, investors can identify suitable indicators, outline transition pathways or establish theories of change, working towards operational readiness and reducing the risk of expensive redesign later.
How We Can Help
SFDR 2.0 significantly remodels the EU’s sustainable finance rules. With clearer categories, a formalised framework for impact investing, strengthened naming standards and a simplified safeguard system, the proposal aims to create a simpler regulatory environment. Much still depends on Level 2 and the final text of the SFDR 2.0, which has to undergo the legislative process, but organisations that prepare ahead of time will be better positioned to manage the transition and maintain trust with investors. If you have any questions or if you would like to know more about the SFDR 2.0? Please contact our specialists. They are happy to help you.
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