Resetting the Sustainable Finance Frame-work: First Look at the EU Commission’s SFDR 2.0 Proposal and its Implications for VC/PE Fund Managers

On 6 November 2025, a draft of the revised Sustainable Finance Disclosure Regulation (SFDR 2.0) was leaked, giving the market a sneak preview of the European Commission’s reform plans. On 20 November 2025, the Commission officially published its proposal for SFDR 2.0, which is intended to replace the current SFDR regime that has been in force since March 2021 and serves as the principal pillar of the EU Sustainable Finance framework. 

Consistent  with the Omnibus Sustainability Package of 26 February 2025, which seeks to ease the administrative burden under the CSRD, CSDDD and EU Taxonomy Regulation, the SFDR 2.0 proposal pursues two core objectives: first, to simplify and streamline sustainability‑related disclosure requirements for financial market participants; and second, to strengthen investors’ ability to understand and compare sustainability‑linked products while safeguarding them against misleading ESG claims. 

This briefing considers whether the Commission’s proposal marks a successful first step toward these goals and highlights what VC and PE fund managers currently disclosing sustainability-related information under the existing SFDR regime need to know now.

Executive Summary

• Focus on the Product: The regime will refocus the SFDR away from actors in the financial markets to products offered that have sustainability characteristics.
• New Product Categories: Five categories replace the current product framework: Transition Products (Art. 7), ESG Basics Products (Art. 8), Sustainable Products (Art. 9), Combination Products (Art. 9a) and Non‑Categorized Products (Art. 6a) – each with specific objectives, thresholds, and exclusions.
• Entity-Level Changes: The proposal removes entity-level PAI obligations entirely; PAI disclosures only apply at product level for Transition and Sustainable Products and allow financial market participants more freedom in determining relevant indicators.
• Impact Investing Recognized: For the first time, impact investing is explicitly defined and regulated, requiring intentionality, measurable objectives, and outcome reporting for products with impact goals.
• Reporting Simplified: At entity level, disclosures will focus solely on how sustainability risks are integrated into decision-making. At product level, website disclosures are expected to be largely eliminated. Further reporting template simplifications are to be expected.
• Marketing: Strict naming and marketing rules will apply to sustainability-related financial products; new Level 2 standards and templates will follow.
• Timeline: Proposal is now in the trilogue discussions between European Parliament, the Council and the Commission. Once agreed, an 18-month implementation period applies in which implementation measures will be produced by the Commission and ESMA. Extended timelines apply for certain products and an opt-out exists for closed-ended funds created before application. 

1. Personal Scope: Removal of Investment Advice and Portfolio Management Service Provider from Product-Level Obligations

The proposal for the revised SFDR 2.0 narrows its scope to financial market participants that manufacture, manage, or make available financial products. Financial advisers providing investment advice are excluded from this scope, as their role is limited to distributing products offered by other financial market participants and matching them with clients’ (sustainability) preferences. For the same reason, portfolio management services, where portfolios are managed on a discretionary client-by-client basis, are also carved out. 

2. Five New Product Categories Replace the Current Framework

Under the current SFDR, a three-tiered system has emerged, in which most products fall into the middle category. Art. 8 covers financial products that promote environmental or social characteristics (among other characteristics). Art. 9 covers financial products that have sustainable investment as their objective. Art. 6 covers all other products and requires disclosure of how sustainability risks are integrated into investment decisions. This system will be completely revised.

The new proposal introduces five distinct product categories:

• Transition Products (Art. 7): Products with clear and measurable transition objectives related to sustainability factors, including environmental or social transition objectives
• ESG Basics Products (Art. 8): Products that integrate sustainability factors in their investment strategy beyond the consideration of sustainability risks;
• Sustainable Products (Art. 9): Products that invest in sustainable undertakings, sustainable economic activities, or other sustainable assets, or contribute to sustainability;
• Combination Products (Art. 9a): Products that claim that they combine categorized products; and
• Non-Categorized Products (Art. 6a): Products not covered be the foregoing classifications which may include limited information on whether and how they consider sustainability factors.

2.1. Transition Category (Art. 7)

2.1.1. Objective and Scope

The ‘transition’ category captures financial products that aim to support the transition of undertakings, economic activities and other assets towards sustainability, or contribute to such transition. This category aims to address current challenges to adequately cover so-called ‘brown to green’ investment products. 

2.1.2. Contribution Criteria (70 % Threshold)

Transition Products must have a 70 % threshold of investments meeting a clear and measurable transition objective related to sustainability factors, measured using appropriate sustainability-related indicators. Qualifying investments include: portfolios managed based on EU climate transition or Paris-aligned benchmarks; Taxonomy-aligned economic activities (including transitional activities); undertakings with credible transition plans or science-based targets; sustainability-related engagement strategies; and portfolio-level transition targets such as emission reductions over time. Products with at least 15 % Taxonomy-aligned investments automatically meet the contribution criteria.

2.1.3. Exclusions

Certain mandatory exclusions are introduced for Transition Products, characterized by a mixed bag of unwanted business areas and very basic human rights and social standards. Transition Products must not invest in (i) controversial weapons; (ii) tobacco cultivation and production; (iii) violations of the UN Global Compact Principles/OECD Guidelines for Multinational Enterprises; (iv) hard coal and lignite; (v) companies developing new projects for oil or gaseous fuels; and (vi) companies developing new projects for, or without a phase-out plan from, hard coal or lignite for power generation. By partially referencing the Delegated Regulation on EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, the exclusion list contains a few obvious choices, whereas choices seem rather arbitrary looking at common exclusion lists used in the market, such as covering tobacco but neither alcohol nor gambling.

2.2. ESG Basics Products (Art. 8)

2.2.1. Objective and Scope

The ‘ESG Basics’ category consists of financial products whose strategy or design is based on selected sustainability factors. This category caters for products which do not specifically pursue a sustainability- or transition-related objective but integrate sustainability factors in their investment strategies through credible sustainability-related approaches.

2.2.2. Contribution Criteria (70 % Threshold)
ESG Basics Products must have a 70 % threshold of investments integrating sustainability factors in accordance with the binding elements of the investment strategy, measured using appropriate sustainability-related indicators. Qualifying approaches range from including investments with outperforming ESG ratings, including investments that outperform the “average investment universe” on a specific appropriate sustainability indicator as well as portfolio companies with a proven positive track record related to sustainability factors.

2.2.3. Exclusions

Again, a very selective exclusion catalogue is provided for. It cross-refers to the exclusion list from the Delegated Regulation on EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, but does not cover all this list. ESG Basics Products must not invest in (i) controversial weapons; (ii) tobacco cultivation and production; (iii) violations of the UN Global Compact principles/OECD Guidelines for Multinational Enterprises; and (iv) hard coal and lignite. Notably, oil, gas and high-CO2-emmitting energy production have not been cross-referenced.

2.3. Sustainable Products (Art. 9)

2.3.1. Objective and Scope

The ‘Sustainable’ category consists of financial products that invest in companies, assets or activities that are sustainable or that pursue, or positively contribute to, environmental and/or social objectives. This category captures financial products with a high level of ambition, selecting investments based on proven standards and tools.

2.3.2. Contribution Criteria (70 % Threshold)

Sustainable Products must have a 70 % threshold of investments meeting a clear and measurable objective related to sustainability factors, including environmental and social objectives, measured using appropriate sustainability-related indicators. Qualifying investments include: EU Paris-aligned benchmarks; Taxonomy-aligned economic activities; European green bonds; co-investments with European Union budgetary guarantees or financial instruments under European Union programs pursuing environmental or social objectives; as well as EuSEF. Products with at least 15 % Taxonomy-aligned investments automatically meet the contribution criteria.

2.3.3. Exclusions

The exclusion list for Sustainable Products uses the Transition Category list and extends this by the remaining items from the Delegated Regulation on EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, i.e. (i) activities linked to oil fuels and gaseous fuels; and (ii) electricity generation with GHG intensity exceeding 100g CO2 e/kWh.

2.4. Combination Products (Art. 9a)

A newly introduced Art. 9a now addresses multi-layered financial products, such as fund of funds. Financial products that invest in, or otherwise combine, sustainability-related financial products are treated as meeting the relevant category requirements if they reach the 70 % threshold through investments in those underlying categorized products or through other investments that themselves satisfy the applicable category criteria, and if they comply with applicable exclusions. 

Where a non-categorized product invests in sustainability-related financial products but does not itself meet the conditions to be categorized, it must clearly disclose the composition of its portfolio, indicating the relative shares of the underlying categorized products and the proportion of investments that do not fall under any category. Such products are not permitted to use sustainability-related terms in their names. However, they may refer to sustainability aspects in their marketing communications, provided that such statements are clear, fair, not misleading, and strictly aligned with the product’s actual feature.

2.5. Non-Categorized Products (Art. 6a)

All products that do not meet the above criteria are considered non-categorized products under the proposal. The rules for such products aim to prevent greenwashing by restricting sustainability-related statements for such products. 

Non‑categorized products may include information on whether and how they consider sustainability factors in pre‑contractual documentation, provided that such information is not a central element of the documents, it is not included in the KIID or KID; and it does not amount to sustainability‑related claims reserved for categorized products. 

Information is deemed non‑central where it is secondary to the presentation of product characteristics, neutral in tone, and limited to less than 10 % of the space allocated to the investment strategy description. 

Where financial market participants disclose sustainability‑related information for non‑categorized products, they must also provide a periodic report describing how these considerations were applied.

3. Significant Changes at Entity Level

The proposal fundamentally reshapes the principal adverse impact (PAI) framework by removing entity‑level, i.e. fund manager-level, PAI obligations altogether. 

This is a major shift from the existing regime. Under the current SFDR, financial market participants must publish entity‑level statements on due diligence policies for principal adverse impacts using mandatory indicators under Commission Delegated Regulation on Regulatory Technical Standards for the SFDR (RTS), or explain why they do not comply. The revised SFDR abandons this entity‑level approach and its prescribed indicators. PAI disclosures will apply only at product level and only to Transition Products (Art. 7) and Sustainable Products (Art. 9). For these products, managers must identify and disclose the PAIs of their investments and explain any measures taken to address them. ESG Basics Products (Art. 8) and Non-Categorized Products are not subject to PAI disclosure requirements.

However, the obligation to disclose how sustainability risks are integrated into investment decisions remains at the same level, ensuring that managers continue to address the potential impact of sustainability‑related events or conditions on financial returns.

4. Recognition and Requirements for Impact Investing

Impact investing is for the first time explicitly recognized and regulated within the SFDR framework. Whilst the current SFDR does not provide for specific recognition of impact investing practices, the revised regulation acknowledges the specific characteristics of impact investing, including the objective of intentionality and targeting measurable change in specific pre-defined environmental or social areas with an upfront theory of change and with reporting on the outcomes. 

A new definition is introduced for sustainability-related financial product with impact, meaning a Transition or Sustainable Product that, in addition, has as its objective the generation of a pre-defined, positive and measurable social or environmental impact. 

For such products, the information to be disclosed must additionally contain the intended impact(s) in terms of specified environmental or social objectives, underpinned by a pre-set impact theory; and 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. These disclosure requirements seem to reflect the core principles of impact investing practice, requiring ex-ante intentionality, measurability and accountability for outcomes.

5. Marketing and Naming Rules (Art. 13)

Another element of the draft is the dedicated section on marketing communications and naming rules as the areas the Commission views greenwashing risks most acute.

The Commission reiterates that marketing materials must not contradict the information disclosed under the SFDR. Sustainability-related claims may only be used in the names and marketing communications of products categorized under Art. 7, 8 and 9, and only where such claims are clear, fair, not misleading and aligned with the product’s actual sustainability features. Non-Categorized Products (Art. 6a) are prohibited from using sustainability-related claims in either their names or marketing communications, with the sole exception of Combination Products under Art. 9a, which may refer to sustainability aspects in marketing communications (but not in their names), provided the information remains clear, fair and not misleading. Where ESG ratings are referenced in marketing communications, financial market participants must also provide on their website the disclosures required under the ESG Ratings Regulation (EU) 2024/3005 and include a link to those website disclosures directly in the relevant marketing materials.

6. New Level 2 Rules – Commission Mandate

New Art. 19a, 19b and 19c introduce transitional provisions and Commission empowerments to specify via delegated acts: the conditions for investments to contribute to transition-related or sustainability-related objectives or to integrate sustainability factors; voluntary PAI indicators; methodologies to calculate the 70 % threshold; conditions for investment approaches to qualify; and disclosure templates (not exceeding two pages for general disclosures and one page for impact disclosures). Indicators should build on those in Annex I of Commission Delegated Regulation for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks and Commission Delegated Regulation on Sustainability Reporting Standards, ensuring continuity with current market practices.

7. Reporting Simplifications

Further simplifications can be expected in reporting practices. With the elimination of PAI reporting, website disclosures at entity (i.e., fund manager) level will be limited to the integration of sustainability risks into the decision-making process. At the product level, website disclosures are expected to disappear entirely. Categorized products will merely refer to their pre-contractual and periodic disclosures. It remains to be seen whether and to what extent the current debate on making such potentially confidential documents accessible will resurface during the SFDR 2.0 trilogue. The Commission also intends to simplify templates for pre-contractual and periodic reports. However, given that the legislative process is still at an early stage, the scope and extent of these simplifications remain entirely speculative.

8. Timeline, Grandfathering and Opt-Out

Proposal is now in the trilogue discussions between European Parliament, the Council and the Commission. This process can be expected to last at least well into 2026 if not beyond. 

The Regulation will then apply from 18 months after entry into force. Financial market participants must apply the new rules to insurance-based investment products (IBIPs), pension products, pension schemes and pan-European personal pension products (PEPPs) 12 months after the date of application (i.e. 30 months after entry into force), as these products are not subject to ESMA guidelines on funds names and require more time to implement the new criteria, especially exclusions. 

Financial market participants may opt out of SFDR 2.0 entirely for closed-ended financial products that have been created and distributed before the date of application (i.e. where a final closing has been conducted). It remains unclear which (if any) disclosure obligations remain for such products as the current SFDR is repealed and thus has no further legal effect. 

An opt-out mechanism for financial market participants managing products only marketed towards professional investors was included in earlier drafts but has been dropped from the final proposal.

9. Assessment, Implications and Future Developments

The SFDR 2.0 proposal represents a clear move toward consolidating the fragmented EU sustainable finance landscape. By aligning the SFDR more closely with the ESMA Guidelines on fund names and the EU Taxonomy framework, the proposal moves the regime from a purely disclosure-based instrument toward a more integrated and internally coherent system. 

The removal of entity-level PAI disclosures is particularly welcome as such rules where never really clear for multi-product managers. The SFDR 2.0 proposal should reduce compliance efforts while preserving product-level transparency. 

At the same time, the character of the SFDR shifts. What began as a disclosure regime designed to prevent greenwashing by linking different transparency requirements to different degrees of sustainability ambition now introduces substantive conditions for product categorization. Only products meeting the 70 % threshold and respecting the applicable Paris-aligned Benchmark or CTB-style exclusions may claim the respective categories and benefit from the associated flexibility in naming and marketing. This represents a notable step towards a quasi-labelling framework, despite the SFDR’s original intention to avoid becoming one. 

The explicit recognition of impact investing is equally welcome. Until now, impact funds operated under an undefined and market-driven concept of ‘impact’. SFDR 2.0 introduces a clearer set of parameters: intentionality, measurability, and outcome reporting; without fully constraining existing approaches. The challenge will be to strike the right balance between necessary standardization and the preservation of the diversity that characterizes current impact strategies. 

As always, the legislative process will determine how much of this architecture ultimately remains. In particular, a whole set of new implementing measures must be drafted and adopted, which considerably form the practical implementation of the new SFDR regime.