SFDR 2.0: What the Leaked Drafts Reveal for Sustainable Investors

Luciano Asinelli, ESG Regulatory Analyst, Impact Cubed

As Brussels prepares to unveil its long-awaited SFDR review on 19 November, leaked documents paint a clear picture of what we should expect: simplification, interoperability, and a renewed focus on clarity for end investors.

Impact Cubed’s Regulatory Analyst Luciano Asinelli examines how the proposed SFDR 2.0 framework could reshape sustainable finance, shifting the focus from disclosure overload to outcome-driven accountability.

From Principles to Categories

Like the UK’s Sustainability Disclosure Requirements (SDR), SFDR 2.0 will introduce three new fund categories: transition (new Article 7), sustainability integration (new Article 8), and sustainable (new Article 9), all of which are expected to require at least 70 per cent of assets aligned with measurable sustainability or transition objectives, mandatory exclusions calibrated to CTB/PAB-style rules (similar to ESMA Fund Name Guidelines), and a prescribed list of permitted investment types. This structure replaces the Article 8/9 distinction with a more operational framework that is easier to interpret and more consistent across jurisdictions. The focus shifts from principles and intent to quantifiable outcomes, supporting investors’ ability to understand and compare how funds contribute to sustainability in practical terms. This indicates a crucial shift from philosophical aspiration to measurable accountability.

Scope & Exemptions

SFDR 2.0 narrowly tailors the scope. Alternative Investment Funds (AIFs) marketed exclusively to professional investors may opt out of the product categories (with the option to opt in for signalling consistency). Closed-ended funds closed to new investment before application are exempt. Portfolio management and investment advice exit SFDR scope, meaning those services neither make entity-level disclosures nor carry product categories.

The Missing Definition

While the familiar Article 2(17) definition of a sustainable investment - previously framed around contribution, Do No Significant Harm (DNSH), and good governance - will be deleted, its principles remain. The draft suggests that these components will be embedded within the new fund categories, effectively recontextualising rather than abandoning them. However, in the absence of a central definition many questions remain. How will DNSH tests be verified? Over what time horizon will compliance be measured? Until these practicalities are resolved, uncertainty will persist.

Principal Adverse Impacts (PAIs) Reframed

One of the most significant changes concerns the Principal Adverse Impact (PAI) regime. Both entity- and product-level PAI will be eliminated, but the indicators themselves will remain in place, forming the quantitative backbone of the new SFDR framework. Now aligned with the Corporate Sustainability Reporting Directive (CSRD), these indicators will underpin product-level categorisation, ensuring that DNSH assessments continue to be based on consistent, comparable data. SFDR 2.0 is also expected to introduce harmonised pre-contractual/periodic disclosure templates capped at two pages. Websites remain, but only to host those templates, avoiding duplicative long-form web disclosures. This preserves comparability while retiring process-heavy PAI statements, reducing administrative burden while keeping focus on the metrics that matter most to investors.

Naming, Marketing & Impact

SFDR 2.0 embeds naming/marketing restrictions on sustainability terminology for products that do not meet category rules. “Impact” usage is restricted to funds pursuing explicit, measurable outcomes with additional disclosures. In essence, the “impact” layer is an add-on, not a distinct category.

In Short: What’s Been Removed

·       PAI regime (entity & product)

·       Taxonomy-alignment disclosures (under SFDR)

·       Remuneration policy disclosures

·       Portfolio management & investment advice from scope

DNSH, CSRD and the Central Role of Data

Under SFDR 2.0, DNSH assessments will increasingly rely on the EU Taxonomy and corporate data disclosed under CSRD. This alignment promises greater consistency across the sustainable finance landscape. But it also introduces risk. If DNSH is reduced to a compliance checkbox, nuance could, and almost undoubtedly will, be lost. The credibility of SFDR 2.0 will ultimately hinge on data quality. Regulation continues to pivot away from subjective scores and towards factorised ESG data i.e. metrics directly linked to measurable outcomes. For asset managers, this means greater emphasis on indicator-level transparency, robust data collection, and reliable reporting methodologies.

Curbing Greenwashing

The proposed reforms are designed to make greenwashing more difficult, though opportunities for exploitation remain inevitable. By standardising indicators and introducing explicit allocation thresholds, the new framework curtails the flexibility that previously allowed interpretations of 'sustainable.' Anchoring disclosures in quantified, CSRD-aligned indicators narrows the scope for label inflation and subjective ESG storytelling. Asset managers will need to demonstrate, rather than simply declare, how fund holdings align with real-world, quantifiable sustainability outcomes.

A Phased Implementation

The European Commission’s official timeline will only be confirmed once the legislative proposal is published, but we can reasonably expect a phased implementation. There is no specific grandfathering for existing Article 8/9 products. Following adoption, the regulation will proceed through the Council and Parliament before entering into force, likely followed by a transition period for fund reclassification and documentation updates. In practice, this means entity-level PAI reporting may cease after the first applicable reporting cycle, with asset managers expected at that point to adopt simplified, product-level disclosures aligned with CSRD and the Taxonomy. Prudent managers will begin mapping their existing Article 8 and 9 products to the proposed categories as soon as possible in order to provide maximum runway in which to identify and rectify data gaps.

Conclusion: From Compliance to Credibility

SFDR 2.0 represents more than a regulatory update, it’s a signal of maturity in Europe’s sustainable finance ecosystem. By simplifying categories, integrating disclosure regimes, and focusing on data integrity, the EU is pushing for not just for clarity and interoperability but also credibility; confronted with the current political climate and the cynicism surrounding it, this could not be more timely.

The leaked documents confirm that obtaining the new categorisations will be significantly more demanding than qualifying under the current Article 8/9 classifications, given the introduction of quantitative thresholds, exclusions, and stricter evidential standards. In this context, ensuring a robust and transparent ESG data framework becomes essential. Equally, navigating the reclassification process will require strong regulatory expertise to ensure that investment strategies, governance controls, and reporting align with the revised framework.

In practical terms for investors, this should mean fewer labels but stronger emphasis on evidence. Those prepared to demonstrate sustainability through transparent, measurable indicators will not only meet the regulation, but lead the market when it comes into force.