On November 20, 2025, the European Commission proposed changes to the Sustainable Finance Disclosure Regulation (SFDR 2.0). These changes signal significant reforms to EU sustainability disclosure rules.
The proposal will move to the European Parliament and Council for approval, with implementation expected between 2027 and 2028.
This revision is part of the European Commission’s broader simplification initiatives to make EU sustainable finance rules more efficient, straightforward, and proportionate. The reform focuses on two main goals:
- Simplify and reduce sustainability-related administrative and disclosure requirements for financial market participants (FMPs), while enhancing operational coherence.
- Improve investors’ ability to understand and compare sustainability-linked financial products.
What SFDR 2.0 Could Mean for ESG Compliance
As part of the proposal, the Commission released its own figures on the adoption of Articles 8 and 9, (funds promoting environmental or social characteristics and funds with a sustainable investment objective), stating that they represent almost 50% of EU assets under management and over 60% of EU funds. This figure reflects both public and private market funds.
While our experience and private market data suggest that adoption among smaller private managers is lower, larger private firms, given their scale and investor expectations, tend to align with Article 8 or 9 classifications, driving much of this share.
The pace of new funds seeking Article 8 and 9 classification has slowed considerably in recent months. In private markets, they now represent under 5% of new launches, and Morningstar data shows a similar decline in the public equity space. In the run up to the SFDR 2.0 launch, we expect this trend to intensify, with managers spending the next few years preparing for the new regime and assessing how their fund can qualify under new categories, rather than seeking new labels under the current framework.
Once SFDR 2.0 takes effect, we expect this dynamic will shift as a rush to categorise as many funds as possible under the new system happens, driven by the relatively low bar to qualify and the Commission’s endorsement of the use of estimates, which will make compliance easier.
As before, this first wave of rapid adoption may likely be followed by a second wave of reclassification as questions around greenwashing emerge and some funds revise their strategy or step back from categories they may struggle to qualify for. Managers who move early and build a clear and well-structured disclosure framework gain first-mover advantage. This approach also avoids costly adjustments later.
The new sustainable product category may likely absorb most of today’s Article 9 funds and become the most advanced part of the market. Current Article 8 funds will be split between the transition and ESG integrated categories. Funds that do the bare minimum today (e.g. public equity strategies based only on exclusions) may find it difficult to qualify under the new system due to requirements to show performance above peers or benchmarks on sustainability factors.
The alternatives space is set to benefit the most from the new system. Managers who previously stayed away from SFDR because of data gaps or heavy compliance costs are now likely to engage. The formal endorsement of estimates, lower reporting costs, and the creation of categories that fit better with private market and real asset strategies make the new system far more workable for them.
SFDR 2.0 Key Changes Explained
The proposal introduces several structural changes that reshape how firms classify products, report sustainability data, and manage exclusions. Here’s a breakdown of the most significant reforms:
I. Deletion of the Definition of “Sustainable Investment”
The proposal deletes the existing definition of “sustainable investment” (previously central to the SFDR). The Commission concluded that the term caused confusion, created duplication, and excluded transition investments. Instead, its core concepts (including contribution to environmental or social objectives, the “do no significant harm” principle, referenced as DNSH, and good governance practices) are incorporated into each product category, preserving continuity while simplifying application.
II. New DNSH and Common Exclusions
The current DNSH mechanism, based on Principal Adverse Impact (PAI) indicators, is replaced by a set of common exclusions, as the PAI approach has not produced comparable results. The exclusions will apply to:
- Companies involved in controversial weapons
- Tobacco cultivation or production
- Violations of UN Global Compact (UNGC) or Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises
- Companies with ≥1% revenues from coal or lignite
- Companies with ≥10% revenues from oil fuels
- Companies with ≥50% revenues from gaseous fuels
- Electricity generation with Greenhouse Gas (GHG) intensity > 100 g CO₂e/kWh
These criteria target activities widely regarded as most harmful and ensure a harmonized approach to DNSH across the EU.
III. New Product Categories and Simplification
The proposal creates three categories of sustainability-related products:
- Sustainable products: Pursuing a clear environmental or social objective (aligned with the EU Taxonomy or similar standards).
- Transition products: Financing the transition of companies or activities toward sustainability (e.g., via credible transition plans or science-based targets).
- ESG-integrated products: Integrating ESG factors into investment decisions beyond risk management. They may invest in securities with above-average ESG ratings, assets that outperform peers on key sustainability indicators, or companies with a proven positive sustainability track record. They may also combine such investments with those under the transition or sustainable categories, or use other justified ESG approaches, provided these are clearly explained in product disclosures.
Each category must have at least 70% of investments aligned with its stated sustainability goal, with the remaining 30% allowed for diversification, hedging, or liquidity needs.
IV. Recognition of Impact Investing
The proposal formally acknowledges impact investing within the sustainability and transition categories. Impact products must demonstrate intentionality, measurable change, and transparent outcome reporting through a defined theory of change.
Streamlining Compliance and Reducing Costs
Beyond redefining product categories, SFDR 2.0 introduces practice measures to simplify compliance and reduce costs for firms. These changes aim to make sustainability reporting more proportionate and accessible, particularly for smaller managers. Key proposals include:
- Entity-level disclosures (PAI statements) deleted to avoid overlap with the Corporate Sustainability Reporting Directive.
- Simpler, shorter templates (maximum two pages) focused on key sustainability indicators.
- Use of estimates and third-party data are formally recognised, provided transparency requirements are met.
- Estimated 25–35% reduction in compliance costs, particularly for small and medium-sized enterprises.
- Removal of PAI and entity-level reporting expected to save ~€56 million annually.
- Lower product-level costs once the new categories are fully adopted.
SFDR 2.0 Impact Will Be Gradual, Not Immediate
SFDR 2.0 will not transform the market overnight. For the next few years, most managers will likely stay focused on the current framework while preparing for the new one. The proposal offers a more pragmatic and proportionate structure, one that reduces costs and provides clearer categories for investors, but its full impact will only be felt once it is in force.
Once the new system comes into effect, we expect a period of confusion combined with pressure from both limited partners and peers to classify under the new categories. Managers that wait until the last minute will face a higher risk of greenwashing and may be forced to reclassify later. Working now to future proof current disclosures will give a clear first mover advantage, help maintain consistency across products, and save time when fundraising once SFDR 2.0 becomes the new market standard.
Practical Steps Firms Should Take Now
With SFDR 2.0 on the horizon, firms that act early will reduce risk and position themselves competitively. Here are the priority actions to start now:
- Maintain current SFDR compliance: Nothing changes yet, so keep existing processes in place.
- Map products to the new categories: Begin assessing which funds align with sustainable, transition, or ESG integrated classifications.
- Review exclusion policies: Make sure your policies align with the common exclusion list proposed under SFDR 2.0.
- Prepare for shorter, standardised templates: Streamline data sources and reporting processes to meet the potential two-page format.
- Engage with trusted advisors: Working with experienced third parties can accelerate readiness and reduce compliance risk.
Taking these steps now will make the transition smoother and help firms maintain investor confidence when SFDR 2.0 becomes the market standard.
Future-Proof Your SFDR Strategy
At ACA, our ESG advisory practice helps firms to future-proof SFDR disclosures and develop strategies to align with the forthcoming product categories and standards. In addition, our ACA Ethos platform simplifies data collection, improves reporting accuracy, and supports alignment with evolving EU sustainability requirements.
Acting early means less disruption and more competitive positioning when SFDR 2.0 becomes law. Connect with us to prepare for SFDR 2.0.