On 20 November 2025, the European Commission published its proposal to amend the Sustainable Finance Disclosure Regulation (“SFDR”), marking what is arguably the most significant development in the EU sustainable finance framework since SFDR first came into force. Commonly referred to as “SFDR 2.0”, the proposal signals a decisive shift away from a disclosure-led regime towards a more structured system of formal product categorisation. If adopted, the reform will reshape the way sustainability-related financial products are designed, labelled and supervised across the European Union.
The original SFDR was conceived primarily as a transparency regime. Its Articles 6, 8 and 9 did not establish formal “labels” but rather tiers of disclosure obligations. Over time, however, those disclosure categories came to function in practice as de facto product classifications. Market participants, distributors and investors frequently interpreted Article 8 and Article 9 as shorthand indicators of a product’s sustainability ambition, notwithstanding the fact that the Regulation itself did not prescribe minimum portfolio thresholds or uniform substantive criteria. The result was interpretative divergence, regulatory uncertainty and, in some cases, allegations of greenwashing.
SFDR 2.0 seeks to address these shortcomings by replacing the existing Article 8 and Article 9 designations with three new voluntary sustainability-related product categories: Transition, Environmental, Social and Governance (“ESG”) Basics and Sustainable. In addition, the proposal contemplates an “Impact” sub-category for products that pursue a predefined, measurable positive environmental or social outcome, as well as a “Combined” category for fund-of-funds structures investing across multiple sustainability-labelled products.
The introduction of these categories reflects a clear policy choice: sustainability characteristics are no longer to be inferred from narrative disclosures alone but instead anchored in defined and verifiable criteria.
A central innovation of SFDR 2.0 lies in the imposition of quantitative minimum thresholds and mandatory exclusions as conditions for categorisation. Each of the three principal categories is subject to a minimum 70% investment threshold, calibrated to the specific objective of the product in question. This quantitative floor represents a marked departure from the current regime, under which no uniform percentage requirement applies at Level 1.
For products seeking classification as “Transition”, at least 70% of investments must meet a clear and measurable transition objective linked to sustainability factors, including environmental or social transition objectives embedded within the binding elements of the investment strategy. The proposal aligns the mandatory exclusions applicable to such products with the EU Climate Transition and EU Paris-aligned Benchmarks framework and introduces additional fossil fuel-related prohibitions, including restrictions on companies developing new coal or lignite projects or lacking credible phase-out plans. Notably, Transition products must also identify and disclose the principal adverse impacts (“PAIs”) of their investments and explain the actions taken to address those impacts. The requirement to explain responsive action, rather than merely describe how PAIs are “taken into account”, may prove to be one of the most substantive enhancements in terms of stewardship accountability.
The “ESG Basics” category is designed for products that integrate sustainability factors in a systematic and measurable manner without necessarily pursuing a distinct sustainability objective. Here too, a minimum 70% threshold applies, linked to the proportion of investments integrating sustainability factors in accordance with the binding elements of the investment strategy. The same core exclusions under the SFDR 2.0 framework apply. In policy terms, this category appears intended to capture a significant portion of existing Article 8 products, while drawing a clearer conceptual line between integration-based strategies and objective-driven sustainable investment strategies.
The “Sustainable” category, which effectively succeeds the current Article 9 designation, requires that at least 70% of investments pursue a clear and measurable environmental or social objective. The applicable exclusions mirror those for sustainability-labelled products under the ESMA Naming Guidelines and include fossil fuel expansion prohibitions as well as enhanced PAI disclosure and mitigation obligations. In practice, managers of existing Article 9 funds will need to reassess portfolio construction, benchmark alignment and Taxonomy integration to ensure continued eligibility under the revised regime.
Although the proposal strengthens substantive requirements, it simultaneously contemplates a simplification of disclosure templates. Pre-contractual and periodic disclosures would be subject to a two-page limit, with the aim of improving clarity, comparability and investor comprehension. This reflects the Commission’s acknowledgement that sustainability disclosures, while extensive, have often proven difficult for retail investors to navigate. The simplification initiative, however, does not amount to deregulation. The formal proposal retains PAI disclosure requirements and preserves EU Taxonomy-related obligations that had been suggested for removal in an earlier leaked draft. It also omits the previously mooted opt-out for products marketed exclusively to professional investors and introduces a mandatory exclusion of companies deriving 1% or more of revenues from hard coal or lignite across all three principal categories.
Products that do not elect into one of the new categories will continue to be subject to sustainability risk disclosure obligations broadly analogous to the existing Article 6 framework. However, the proposal makes clear that such products may not present sustainability considerations as a central feature, nor may they make claims that would effectively encroach upon the reserved terminology of the formal categories. This demarcation underscores the Commission’s intention to curb informal or ambiguous sustainability marketing practices.
Of particular significance is the inclusion of an anti-gold plating provision. Member States and national competent authorities would be precluded from imposing additional requirements relating to sustainability risk consideration, product categorisation criteria or associated disclosures. This measure seeks to promote regulatory harmonisation and mitigate the fragmentation that has characterised certain aspects of the SFDR’s implementation to date.
The proposal will now proceed through the EU’s ordinary legislative procedure and may yet be amended before adoption. The new regime is expected to apply eighteen months after entry into force, which may place its effective date in 2028. Considerable uncertainty remains as to how the transition from the existing SFDR framework will be managed in practice, particularly in relation to product reclassification, investor communications and supervisory convergence.
From a Maltese perspective, the implications of SFDR 2.0 are particularly relevant for UCITS management companies, AIFMs, self-managed funds and investment firms authorised by the Malta Financial Services Authority (“MFSA”) and marketing across the EU. At Zerafa Advocates, we assist clients in conducting detailed gap analyses against the proposed categorisation thresholds, reviewing and restructuring investment strategies to meet Transition, ESG Basics or Sustainable criteria, and aligning offering documentation with both SFDR 2.0 and the EU Taxonomy framework. We also advise on governance enhancements, PAI monitoring frameworks, engagement policies and board-level oversight to ensure that sustainability claims are substantiated by operational reality. In an environment where regulatory scrutiny of greenwashing is intensifying at both EU and national level, early and structured legal input will be critical to safeguarding both compliance and reputation
SFDR 2.0 thus represents more than a technical revision. It reflects a maturing phase in the EU’s sustainable finance agenda, characterised by a shift from broad transparency principles towards structured categorisation and measurable standards. For asset managers and investment firms, the reform necessitates not only documentary updates but also a substantive review of investment strategies, exclusion policies, governance arrangements and engagement practices. In moving from disclosure to definition, the Commission has signalled that sustainability labelling within the EU will increasingly depend on demonstrable alignment rather than narrative positioning.