The Commission proposes to transform the existing disclosure system into a categorization framework, establishing certain minimum standards for sustainability-related financial products. Key elements of the reform include the abolition of several existing disclosure obligations as well as the introduction of product categories with minimum investment thresholds, mandatory investment exclusions, and predefined investment strategies.
Background of the Reform – Issues with the Current Regime
Since the SFDR came into force in 2021, it has become apparent that some of its key objectives have only been partially met. In addition to the practical use of Articles 8 and 9 as labels, it has been widely criticized that the definition of “sustainable investment” is too broad and insufficiently precise, resulting in considerable uncertainty for market participants. Furthermore, the requirement to disclose principal adverse impacts (PAI) at the entity level has proven administratively burdensome and often yields disclosures that are hard to compare due to diverging data sources and methods.
Introduction of a New Categorization System
The core of the reform is the complete replacement of the current Articles 6, 8, and 9 SFDR with three main categories (Articles 7, 8, and 9 SFDR) and a complementary mixed category (Article 9a SFDR). This system establishes substantive minimum standards for the first time and is intended to increase comparability of financial products. All categories include a minimum investment threshold of 70%, mandatory exclusions, and require predefined investment strategies. For product categories under Articles 7 and 9, the 70% threshold is considered met if at least 15% of the investments are Taxonomy-aligned.
Article 7 – Transition Category
Financial products in this category must allocate at least 70% of their assets to companies that are on a credible transition pathway to sustainability or are pursuing specific transition objectives.
Article 8 – ESG Basics Category
Financial products under Article 8 must systematically and verifiably integrate sustainability factors into their investment and decision-making processes. The minimum threshold of 70% of relevant assets also applies here.
Article 9 – Sustainable Category
The new Article 9 – financial products with a sustainability objective – conceptually continues the approach of the previous Article 9 but is substantively strengthened. Financial products in this category must pursue a clearly defined, measurable sustainability objective with at least 70% of their investments.
Article 9a – Mixed Category
The mixed category addresses products that combine different strategies or invest in products of different categories. It is intended to reflect current market practice, where many products could not be clearly assigned to one sustainability strategy, and will be particularly relevant for fund-of-funds structures.
Impact Investing – Articles 7 (4) and 9 (4)
Under SFDR 2.0, impact investing is recognized as a standalone investment strategy and integrated as an add-on in the transition and sustainable categories. The use of the term “impact” in a product name is only allowed if the provider of the financial product has a measurable social or environmental impact objective and adheres to special reporting obligations.
Mandatory Investment Exclusions
All product categories include binding investment exclusions. These differ only slightly and include investments in:
- companies manufacturing tobacco or prohibited weapons,
- companies violating human rights, and
- companies operating in the fossil fuel sector.
These exclusions establish EU-wide minimum standards and replace the previous system of minimum standards under the “do no significant harm” principle. Providers may additionally choose to apply stricter exclusions voluntarily.
Simplification and Harmonization of Disclosure Requirements
The Commission proposes the abolition of PAI disclosure at entity level as well as the voluntary disclosure of taxonomy alignment at product level.
The new disclosure templates are limited to a maximum of two pages (plus one additional page for impact products), are visually clearer and aligned with the disclosure standards of the Taxonomy Regulation and the CSRD framework. This is an important step in reducing administrative burdens.
New Rules on Marketing and Distribution for Non-Categorized Products
Financial products that cannot be assigned to one of the new categories (current products under Article 6 SFDR) may still disclose sustainability-related information. However, such statements must not be the central marketing message and not contain sustainability claims that are only permitted for categorized products (Article 6a SFDR). Statements regarding environmental or social features must not be a central element of disclosed product information in order to protect investors.
Transition Periods and Exemptions
The draft regulation includes an 18-month transition period from the date of entry into force. This is intended to give financial market participants sufficient time to adjust product strategies, revise data processes, and update internal policies. Exemptions exist for closed-ended financial products that are no longer marketed at the time the SFDR 2.0 enters into force.
Outlook
The reform of the SFDR marks a fundamental shift toward a structured, substantive sustainability product framework. The final content will depend on the outcome of the trilogue negotiations, but the basic architecture is likely to remain. Entry into force of the new rules is not expected before 2027. Financial market participants should nevertheless assess early whether their products meet the new minimum standards and realign their disclosure and marketing processes.