The EU's SFDR 2.0 – what do asset managers need to know?

On 20 November 2025, the European Commission published a proposal to amend the EU Sustainable Finance Disclosure Regulation (SFDR), laying the groundwork for fundamental changes to the way that financial market participants based in or marketing products in the EU, including asset managers, disclose and report sustainability-related matters to investors.

Contrary to an earlier leaked copy of the proposal, the Commission does not currently propose an opt-out from SFDR 2.0 for funds or other  financial products marketed exclusively to professional investors.

The proposed amendments follow long-standing and widely acknowledged issues with the SFDR, including that the existing framework results in disclosures that are too long and complex, making it difficult for investors to understand and compare the environmental or social characteristics of financial products. Additionally, despite being intended to be a disclosure framework, it has effectively been used as a labelling system, causing confusion and increasing the risk of greenwashing and mis-selling.

What are the key areas of impact for asset managers?

New product categories

The proposal moves away from a disclosure-based system to a product categorisation system. It introduces three new product categories, each of which are broadly subject to two key criteria: (i) at least 70% of the portfolio must follow the ESG strategy matching the claims made by the product on a binding basis; and (ii) exclusions to be applied to each category.

Transition category (Article 7  )

Aim/asset allocation

This category is for products where 70% of investments are in companies and/or projects that are not yet sustainable, but that are on a credible transition path, or investments that contribute toward improvements in, for example, climate, environment or social areas.

Assessment of performance against the objective should be monitored and disclosed and be predicated on appropriate indicators identified by the asset manager. Any principal adverse impacts on environmental or social factors should be identified and disclosed, together with any actions taken to address them.

Investments that qualify for the 70% criteria

• Portfolios that replicate or are managed by reference to the EU climate transition benchmark and EU Paris-aligned benchmark.
• Investments in certain economic activities aligned with Regulation (EU) 2020/852 (the Taxonomy Regulation).
• Investments in companies with a credible transition plan for at least one sustainability factor at the level of the company or activity.
• Investments in companies with credible science-based targets.
• Investments accompanied with a credible sustainability-related engagement strategy, targeting specific changes with defined milestones measures with reference to those targets and milestones.
• Investments with a credible transition target set at the level of the portfolio, such as reduction of carbon emissions over time.
• Other investments that credibly contribute to the transition so long as they can be properly justified.

Exclusions to be applied for each category

Exclusion of companies involved in tobacco or controversial weapons or found in violation of human rights as well as those developing new projects for, or not having a plan to phase-out from, hard coal and lignite activities.

ESG basics category (Article 8 )

Aim/asset allocation 

Products that integrate a variety of ESG investment approaches but do not meet the criteria of the sustainable or transition investment categories. 70% of the portfolio must align with the overall strategy for integrating ESG factors.

The assessment of performance against the objective should be monitored and disclosed based on appropriate indicators identified by the asset manager.

Investments that qualify for the 70% criteria

• Investments with an ESG rating that outperforms the average rating of the investment universe or the reference benchmark.
• Investments that outperform the average investment universe or reference benchmark on a specific appropriate sustainability indicator.
• Investments that favour undertakings or economic activities with a proven positive track record in terms of processes, performance or outcomes related to sustainability factors.
• Other investments integrating sustainability factors beyond the consideration of sustainability risks, so long as can be properly justified.

Exclusions to be applied for each category

Exclusion of companies involved in tobacco or controversial weapons, or found in violation of human rights as well as those generating 1% or more of its revenues from hard coal and lignite activities.

Sustainable category (Article 9 )

Aim/asset allocation

70% of investments in those contributing to sustainability goals (for example, climate, environment or social goals), such as investments in companies or projects that are already meeting high sustainability standards.

The assessment of performance against the objective should be monitored and disclosed and be based on appropriate indicators identified by the asset manager. Any principal adverse impacts on environmental or social factors should be identified and clearly disclosed, alongside any actions taken to address them.

Investments that qualify for the 70% criteria

• Investments in portfolios replicating or managed in reference to an EU Paris-aligned benchmark.
• Investments in taxonomy-aligned economic activities.
• Investments in EU Green Bonds.
• Investments, including co-investments, that finance the same undertaking, project or portfolio identified in financing and investment operations benefiting from a Union budgetary guarantee or financial instruments under Union programmes pursuing environmental or social objectives.
• Investments in European social entrepreneurship funds.
• Other investments in undertakings, economic activities, or assets that contribute to an environmental objective or a social objective, so long as can be properly justified.

Exclusions to be applied for each category

Exclusion of companies involved in tobacco or controversial weapons, or found in violation of human rights as well as those developing new projects for fossil fuel activities, expanding their fossil fuel activities  or developing new projects for, or not having a plan to phase-out from, hard coal and lignite activities.

The proposal also allows for two alternative routes for a "transitional" fund to meet the classification test, other than via the 70% test set out above, by either: (i) investing at least 15% in EU taxonomy-aligned economic activities; or (ii) replicating or being managed in reference to an EU climate transition benchmark or an EU Paris-aligned benchmark that complies with the requirements laid down EU Climate Benchmarks Delegated Regulation (EU/2020/818).

Likewise, the proposal provides for two options, other than the 70% threshold, for a "sustainable" fund to satisfy the classification test, by: (i) investing at least 15% in EU taxonomy-aligned economic activities; or (ii) replicating, or being managed in reference to, an EU Paris-aligned benchmark that complies with Commission Delegated Regulation (EU) 2020/1818.

Impact add-on 

The proposal recognises impact investing by introducing financial products that (i) qualify as Article 7 or Article 9 above and (ii) have as their objective “the generation of a pre-defined, positive and measurable social or environmental impact” (impact add-on).

This is not a category of its own; however, such products would be able to use the term “impact” in their name (while others cannot).

Financial products using the impact add-on must include additional disclosures (and thus have the required infrastructure in place), being (i) the intended impact(s) in terms of specified environmental or social objectives, underpinned by a pre-set impact theory; and (ii) provisions to measure, manage, and report on the desired impact, including in terms of investments by the financial product and the contribution of investors in the financial product.

Phase-in period for threshold

In a positive move for asset managers investing in private assets, the proposal includes a phase-in period, with the 70% threshold needing to be met within a disclosed period.

Non-categorised funds

Under the new Article 6a, for funds not falling within any of the three categories, managers would be able to include in the fund's pre-contractual disclosures information on whether and how it considers sustainability factors beyond the consideration of sustainability risks.

Only products complying with the category criteria will be allowed to make sustainability-related claims in their names and marketing documents. Essentially, this picks up “article 6 products” under the current version of SFDR by embedding naming/marketing restrictions on sustainability terminology for products not meeting category rules – following a similar approach as SFDR 2.0 takes for the impact add-on, just in the opposite direction.

As such, there are strict limitations in relation to sustainability-related information. For example, the information should not constitute claims within the meaning of the Article 7, 8 and 9 products. This is to ensure that investors are not misled that the fund is classified under one of these labels. Additionally, the sustainability-related information should not be a central element of the pre-contractual disclosures and should be neutral and secondary to the presentation of the fund’s characteristics.

Products that invest in labelled products, under the new Article 9a of the SFDR, may provide more sustainability information in marketing communications but not their names, subject to meeting certain conditions. Any sustainability-related claims made in marketing communications must be clear, fair, not misleading and consistent with the sustainability features of the fund.

Product-level disclosures

A notable reduction in the extent of product-level disclosures is evident from the proposal. The aim is to give providers more clarity and certainty on how to design and present the sustainability characteristics or objectives of their products, making them more relevant and comparable for investors.

Managers of both "transitional" and "sustainable" funds will, however, need to identify and disclose principal adverse impacts (PAIs) of their investments on sustainability factors and explain any mitigating action that they have taken. While the European Commission would have the power to specify indicators for this purpose in a delegated act, such indicators would be for "voluntary use". This would appear to indicate that asset managers could decide to use different indicators for these purposes.

Entity-level disclosures

Under the proposal, asset managers would no longer have to publish and maintain information about how they consider PAIs of investment decisions on sustainability factors.

Likewise, fund manager disclosures regarding transparency of their own remuneration policies in relation to the integration of sustainability risks would no longer be required, but sustainability risk disclosures would still be needed.

Grandfathering

Managers of closed products that were established and distributed before the regulation’s application date can opt out of SFDR 2.0. This will be of benefit to existing closed-ended funds.

Reduced scope of SFDR 2.0

The proposal reduces the scope of the regime, with portfolio managers and financial advisers excluded. However, portfolio managers to whom management has been delegated from an in-scope fund are likely to be affected, as they will be contractually mandated to follow the rules.

Timeline

The draft regulation must go through EU's legislative process, which could lead to further changes. It will then come into force 18 months after publication in the Official Journal, so it could be expected to come into force at the end of 2027 (at the earliest) or in 2028.

Osborne Clarke comment 

The asset management industry has been waiting on the edge of its collective seats for the publication of the proposal. Some institutional-only asset managers may be disappointed to see the removal (as against the leaked version) of the professional investor-only fund opt-out, even though it is likely that many institutional investors will probably expect funds into which they invest to fall within one of the three new categories. However, it is yet to be seen whether this will eventually find its way in the final version of SFDR 2.0.

The reduction in and simplification of disclosures is likely to be broadly welcomed by the industry (notwithstanding that some firms may have spent significant resource in establishing frameworks to ensure compliance with the current, less-than-ideal SFDR disclosure requirements).

The regulatory technical standards will include further details on the different criteria and disclosures required. While we have a good idea about what the regime will probably look like, the full picture remains to be seen, not least because changes may be made during the legislative process.