SFDR 2.0 –  EU Commission publishes legislative proposal to review SFDR

Background

The SFDR was adopted on 27 November 2019 and has been in application since March 2021. Following a comprehensive assessment revealing market misuse of Article 8 and 9 classifications as de facto labels, excessively costly application of provisions considered unnecessary by market participants, and insufficient investor protection, the EC conducted consultations from September to December 2023 and gathered feedback through its call for evidence published on 2 May 2025, ultimately recognising that reform was necessary.

The legislative proposal to review the SFDR represents the current disclosure-based regime’s evolution into a product categorisation system for financial products with minimum safeguards and a reduced scope of application.

Notably, the proposal abolishes disclosure obligations regarding entity-level principal adverse impacts (PAIs), the integration of sustainability risks in remuneration policies on their websites and the sustainable investments definition while introducing three new product categories under Articles 7, 8, and 9, each with 70% investment thresholds, mandatory exclusions, and predefined investment strategies. This review also introduces targeted disclosure requirements for products falling into these categories and stringent marketing restrictions for non-categorised products, while proposing certain scope exemptions for closed‑ended funds.

Key takeaways

I. Removal of existing requirements

In line with its simplification agenda, the EC proposes eliminating several existing requirements, such as the following:

• Portfolio managers and financial advisers have been removed from the scope of SFDR.
• Financial market participants will no longer be subject to disclosure obligations regarding entity-level PAIs and the integration of sustainability risks in remuneration policies on their websites.
• The definition of “sustainable investments” in Article 2, point (17) SFDR has been deleted, along with the existing “do no significant harm” principle and “good governance” requirements, now captured through the mandatory exclusions.
• Taxonomy-related disclosures will only be required for Article 7 and 9 products (see Section II) pursuing an environmental objective.
• Financial market participants may choose not to apply this Regulation to closed-ended financial products which were created and distributed before the date of application of this Regulation.

II. Categorisation framework

The proposed framework shifts from a disclosure-based system to a categorisation-based regime, introducing three new product categories under Articles 7, 8, and 9, with key requirements for each category: