Commission publishes long-awaited SFDR 2.0: from product classifications to product categorisation

The European Commission (EC) published a substantial proposal on 20 November 2025 to fundamentally revise the Sustainable Finance Disclosure Regulation (SFDR). The core: less complexity, more clarity for investors and better protection against greenwashing. The proposal replaces a large part of the current obligations and introduces a new system of sustainability-related product categories.

SFDR 2.0 is intended to make the rules more user-friendly, reduce the reporting burden and align better with current market practices, so that capital can flow more effectively towards sustainable economic activities.

Read below the main proposed changes.

Amended scope: investment advice and portfolio management fall outside SFDR 2.0

An important change concerns the scope of the SFDR. Whereas under the current regime both investment advisers and portfolio managers fall within scope, the EC now limits the scope to financial market participants that manufacture, manage or offer products, including:

• fund managers
• insurers
• pension funds
• other providers of pension products (e.g. IBIPs, PEPP)

Investment advisers and portfolio managers must, however, still take clients’ sustainability preferences into account, but these obligations do not form part of the SFDR.

Fewer reporting obligations

Entity level

• The mandatory Principal Adverse Impact reporting (PAI) at entity level will be fully removed.
• The obligation to provide transparency on the way in which the remuneration policy aligns with the integration of sustainability risks will also be removed.
• Transparency regarding the integration of sustainability risks will remain.

Product level 

• PAI information is limited to products in the ‘sustainable’ and ‘transition’ categories.
• Information provided to investors is shortened and simplified: fewer topics in the pre-contractual and periodic templates and better alignment with the new product categories, using clear, measurable and applicable terms.
• The new, simplified templates must also be more user-friendly and better aligned with the needs of retail investors, so that they obtain quicker and clearer insight into the sustainability characteristics of products.

Removal of the ‘sustainable investment’ definition

The proposal removes the existing definition of ‘sustainable investment’ (formerly a central concept within the SFDR). According to the EC, this term caused confusion, led to overlap and excluded transition investments. Instead, key concepts such as contribution to environmental or social objectives, the ‘do no significant harm’ principle (DNSH) and good governance have been integrated into the product categories. This way, the core is maintained while practical application is simplified, according to the EC.

From classifications to categorisation

To replace the current Article 8 and 9 product classifications, the proposal introduces three clearly defined product categories. The categories operate on the basis of two key criteria:

1. Exclusions: meaning that products cannot invest in certain sectors or activities that are considered incompatible with the category.
2. Positive contribution: meaning that a minimum share of 70% of the product must follow an ESG strategy that corresponds with the sustainability claims of the product. The remaining investments must not conflict with that strategy.

The three product categories are:

1. Sustainable products (art. 9)
   • Products that invest in companies, activities or assets that demonstrably contribute to environmental or social objectives.
2. Transition products (art. 7)
   • Products that invest in companies or activities that are demonstrably on their way to improved environmental or social performance, for example on the basis of transition plans or scientifically validated targets.
3. ESG Basics products (art. 8)
   • Products that integrate ESG factors into the investment process, without a specific sustainable or transition objective.

Impact investing
SFDR 2.0 now explicitly recognises impact investing. These are products under Article 7 or 9 aimed at achieving a predetermined, measurable social or environmental effect. Investments focus on companies or activities that offer solutions to specific societal or environmental challenges. Important features are the deliberate intention to achieve positive impact, measurable outcomes and a clear theory of change.

Non-categorised products (Art. 6a)
For products that are not categorised as sustainability-related, financial market participants may voluntarily include information on sustainability aspects. This information must be fair, clear and not misleading, may not feature prominently in pre-contractual documents or marketing, and may not be used in the product name. In practice, this means that sustainability information is presented as subordinate, neutral and limited to a maximum of 10% of the description of the investment strategy.

EU Taxonomy

Sustainability-related financial products are no longer required to disclose their Taxonomy alignment, but may use the Taxonomy voluntarily, for example within a sustainable or transition investment category. The environmental objectives must be defined according to the Taxonomy Regulation and include climate change mitigation and adaptation, the transition to a circular economy, protection of water and marine resources, pollution prevention and control and the restoration of biodiversity and ecosystems.

Transitional regime

With regard to existing Article 8 and 9 products: no transitional regime is provided. This means that once SFDR 2 enters into force, all financial products that currently comply with Article 8 or 9 must comply with the new SFDR 2.0.

In addition, there is no exemption for products that are offered exclusively to professional investors. A previously leaked draft version of SFDR 2.0 included a possible exemption for AIFs available only to professional investors, but this exemption has not been included in the final proposal.
SFDR 2.0 does contain a specific exemption for closed-ended funds that no longer accept new investments before the entry into force of SFDR 2. These funds therefore fall outside the scope of the new rules.

Outlook 

With this proposal, the EC is taking a clear step towards a simpler and more consistent sustainability framework for financial products. With clearly defined product categories, a refined scope and the removal of entity-level PAIs, the foundation is laid for more transparency and less complexity for providers and investors alike.

The European Parliament and the Council will now consider the proposal. Only afterwards will it become clear what the final regulatory framework will look like and when the changes will enter into force in practice. Given the necessary decision-making, we expect that the new SFDR rules will not enter into force before 2028, as implementation follows 18 months after publication in the Official Journal.

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