SFDR 2.0: Navigating the Shift from Disclosure to Categorisation
The European Commission has unveiled its long-awaited proposal to overhaul the Sustainable Finance Disclosure Regulation (SFDR). This marks a significant pivot from a transparency framework to a formal product categorisation system, aimed at tackling greenwashing and simplifying the landscape for investors.
Following the recent release of plans to reform the SFDR, the EU fund market faces another period of significant adaptation. The proposed changes replace the existing Article 8 and 9 disclosure regime with distinct product categories: Transition, Sustainable, and ESG Basics.
Below, we analyse the structural changes, the projected impact on the EU fund landscape, and what asset managers must do to prepare for implementation in 2026–2027.
From Disclosure to Categorisation: The New Framework
The core of the "SFDR 2.0" proposal is the elimination of the ambiguous "sustainable investment" definition, which previously caused significant compliance challenges. In its place, the Commission has introduced a precise labelling system based on investment composition and intent.
The three proposed categories are:
Transition (Article 7) Products: Designed for assets aimed at improvement. At least 70% of the portfolio must consist of investments contributing to measurable transition goals (e.g., science-based targets and engagement strategies).
ESG Basics (Article 8) Products: The entry-level sustainability tier. 70% of investments must integrate sustainability factors.
Sustainable (Article 9) Products: The highest tier for green assets. At least 70% of investments must align with clear sustainability objectives.
Simplified Disclosures and Guardrails
To reduce the compliance burden, the Commission proposes streamlining documentation:
Pre-contractual templates will be capped at two pages, featuring a clear summary titled "How sustainable is this product?".
Entity-level Principal Adverse Impacts (PAIs) are removed entirely.
Product-level PAIs are maintained only for Transition and Sustainable categories, focusing on material impacts rather than exhaustive lists.
Crucially, minimum exclusions will apply across all categories, banning investments in controversial weapons, tobacco, and violators of the UN Global Compact/OECD principles. Transition products face additional restrictions regarding new fossil fuel exploration, while Sustainable products must adhere to full fossil fuel exclusions aligned with Paris-Aligned Benchmarks (PAB).
Market Implications & Data Projections
Preliminary data modelling, drawing on Morningstar’s universe of EU funds, suggests SFDR 2.0 will trigger a massive reallocation of assets. The loose definitions that allowed Article 8 to dominate the market are disappearing, likely resulting in a "barbell" effect where assets move either to the highest sustainability tier or drop the label entirely.
The "Transition" Label Remains Exclusive: Despite the industry's focus on transition finance, the new Article 7 category will likely be the most exclusive club. Because of the requirement for measurable paths to improvement, projections indicate this category will capture a slim minority of the market, between 1.6% and 3% of Assets Under Management (AUM).
A Resurgence for "Sustainable" Products The "Sustainable" (formerly Article 9) category is expected to expand. By moving the qualifying threshold from 100% down to 70%, the regulator has made this tier more attainable for diversified portfolios. Consequently, this segment could double its current footprint, potentially reaching 7% of the market as high-conviction funds migrate upwards.
The Squeeze on "ESG Basics": The days of Article 8 covering nearly 60% of the market are effectively over. The new "ESG Basics" category introduces sharper teeth regarding exclusions and investment composition. As a result, this middle tier is projected to shrink significantly, falling to between 32% and 41% of AUM.
The Return of the Standard Fund (Article 6): The most dramatic shift will be the growth of non-labelled funds. As the "ESG Basics" criteria tighten, thousands of funds that currently claim light-green status will likely be forced to de-classify. This could push the non-sustainable (Article 6) share of the market from its current 41% to as high as 70%.
Implications for Asset Managers
The transition to SFDR 2.0 will require substantial operational adjustments. There is no grandfathering clause; existing Article 8 and 9 funds must requalify under the new rules or face reclassification.
Key Action Items:
Reclassification Strategy: Managers must assess whether their "Paris-aligned" products fit better in the Transition or Sustainable category, a distinction that remains to be clarified in future delegated acts.
Data Strategy Shift: The focus must move from data volume to data credibility. Success will depend on the quality of data regarding exclusions, EU Taxonomy alignment, and verifiable transition plans.
Investor Communication: While disclosures will be shorter, they will be subject to higher scrutiny. Managers must prepare for rigorous interrogation of their qualifying criteria.
Timeline and Next Steps
The proposal is now entering the EU legislative process. Final rules are not expected before 2026–2027.
Critical details, including specific category names, precise thresholds, and reporting templates, will be defined in delegated acts. Asset managers should begin reviewing their packaging inventories and exploring partnerships for reuse targets now to ensure they are not caught off guard when the regulation comes into force.