The proposal presented by the European Commission for the long-awaited SFDR review offers an early glimpse into what may become the next stage of the EU’s sustainable finance framework. Although it is not yet legally binding, as it still has to go through the full legislative process for its approval, the text reflects ongoing developments in EU sustainable finance, following calls from multiple stakeholders, including the EU Platform on Sustainable Finance and the European Supervisory Authorities, for a revision of the regulation.
Below we outline the key elements of the proposal and their potential implications for financial market participants, noting again that the text may still be subject to change before any formal adoption.
New categorisation system
The proposal redefines the familiar “Article 6, 8, and 9” structure, introducing clearer boundaries and minimum exclusion rules. It seeks to create a framework that is both simpler to apply and easier to interpret for investors.
The proposed model introduces four main categories: Transition, ESG Basics, Sustainable, and the “Mixed category”. Each category is associated with specific thresholds and exclusions:
|
Category |
Description |
Key criteria |
Minimum exclusions |
|
Article 7 – Transition |
Products making investments in companies and/or projects that are not yet sustainable but that on a credible transition path or contribute to such transition |
≥70% of assets linked to transition goals |
Activities involved in: Controversial weapons, tobacco, human rights violations. Companies with revenues of 1% or more from hard coal/lignite production/distribution. Companies developing new fossil fuel projects or not phasing out coal/lignite for power generation |
|
Article 8 – Integration |
Products which claim to integrate sustainability factors in their investment strategy but do not meet the criteria of the Sustainable or Transition categories |
≥70 % of assets linked to outperformers or performers with a proven sustainability track record |
Activities involved in: Controversial weapons, tobacco, human rights violations. Companies with revenues of 1% or more from hard coal/lignite production/distribution. |
|
Article 9 – Sustainability objective |
Products with a significant percentage of assets in sustainable economic activities (e.g., taxonomy-aligned). |
≥70 % of assets in sustainable economic activities (e.g., taxonomy-aligned). |
Activities involved in: Controversial weapons, tobacco, human rights violations, and fossil fuels including new coal, oil, gas and lignite power generation. |
|
Article 9a – Mixed category |
Products contributing to sustainability goals such as investments in companies or projects that are already meeting high sustainability standards |
Blend of the criteria above |
As applicable per category combination |
Article 6 products will continue to disclose sustainability risks under Article 6 of the SFDR, while also allowing for voluntary ESG-integration disclosures under the proposed new Article 6a.
Simplification of PAI and disclosure obligations
One of the most consequential aspects of the revision is the simplification of PAI reporting obligations. Under the proposal, entity-level disclosures would be abolished (principal adverse impact statement and remuneration policies).
For the Transition and Sustainable categories, financial market participants must identify and report on PAIs. The European Commission may also define sample indicators; however, these would remain voluntary and build on the current PAIs.
In addition, financial market participants must explain the actions they have taken to address and mitigate any impacts identified.
Recognition of impact investing
For the first time, impact investing would be formally acknowledged under the SFDR. Products seeking measurable environmental or social outcomes could adopt this designation as an add-on to either the “Transition” or “Sustainable” categories.
Such funds would be required to provide additional information on:
- Define clear impact objectives and pathways with an upfront theory of change
- Disclose impact KPIs for measurement
- Implement Impact Measurement and Management frameworks
- Report impact achieved at both investment and investor levels
- Provide specific disclosures
Only funds meeting these criteria could use “impact” in their names.
Additional considerations
- Non-categorised products may add limited information in pre-contractual documents on whether and how they consider sustainability factors, as long as this is not a central element. If included, a corresponding description must also appear in the periodic report.
- Exemptions apply for existing close-ended products created and distributed before the application date.
- Additional modifications include merging website and pre-contractual disclosures into a single, integrated format, aiming to reduce duplication, improve consistency of information across documents, and make it easier for investors to locate and understand key sustainability-related details.
- EU Commission proposes applying SFDR 2.0 18 months after entry into force. Certain insurance and pension products have another 12 months to apply categories and disclosures.
- Existing SFDR RTS will be repealed and replaced by new Level 2 standards, for which EU Commission has no deadline.
Next steps
The proposal presented by the European Commission for the SFDR review sets out a regulatory framework that reflects ongoing stakeholder discussions and prior calls for clarification and alignment. The proposal will need to pass through the EU’s legislative process and adjustments may be made before formal adoption. While no definitive timeline has been confirmed, current indications suggest that the SFDR revision could enter into effect around 2028, giving market participants time to prepare. These dates, however, remain subject to change.
We continue to follow these developments closely. In the meantime, financial market participants should begin by considering how the revised categories, exclusion rules, and streamlined disclosure obligations might affect their current and future products
For further information, we have prepared a detailed presentation that provides all key insights.
Download the full presentation
