The Sustainable Finance Disclosure Regulation(SFDR) is entering a new phase. Often referred to as SFDR 2.0, the European Commission’s proposed overhaul aims to address long-standing criticism of the framework by simplifying, reducing ambiguity, and curbing greenwashing.
While the revised regime is not expected to become fully operational until 2028 at the earliest, the direction of travel is clear. As well as an overarching aim to simplify, product categories will be stricter, sustainability claims will need to be backed by robust data, and asset managers will face higher expectations around transparency, exclusions, and evidence of positive contribution.
For firms that wait, the risk is last-minute portfolio changes, rushed reclassifications, and increased regulatory and reputational exposure. For those who prepare early, SFDR 2.0 offers an opportunity to future-proof products, align strategies with emerging standards, and communicate sustainability more credibly to investors.
Below, we answer some of the most common questions asset managers are asking about SFDR 2.0 and what it means in practice.
What best practices can firms adopt now to prepare for SFDR 2.0?
Although political negotiations are still ongoing and we expect a long transition period, firms can already take meaningful steps to prepare.
While SFDR 2.0 will simplify certain reporting obligations, particularly for non-sustainable funds, it also introduces significantly higher expectations around data quality and substantiation. For example:
- Article 8 products will need to demonstrate that at least 70% of the portfolio integrates sustainability.
- Transition products (Article 7) will need to select and report on metrics that credibly demonstrate meeting a clear and measurable transition objective related to sustainability factors.
- Article 9 products will have to implement exclusionary criteria, which they may not have already been doing.
- Current Article 6 products that make sustainability-related claims will have to remove these from their documentation or name, or find a way to qualify for one of the categories.
- Exclusions and adverse impacts will become more prescriptive, requiring many funds to apply exclusions consistently across portfolios and actively monitor Principal Adverse Impacts (PAIs).
Article 8 and 9 funds should begin assessing how they would transition into the new SFDR categories: ESG Basics, Transition, or Sustainable. Managers of some Article 6 products may also consider whether reclassification makes sense, particularly given the tighter limits on sustainability claims for non-categorized funds. New fund launches should be designed with the future structure of SFDR firmly in mind.
Early preparation allows firms to avoid abrupt strategy changes, limit portfolio volatility, and reduce the risk of misleading disclosures or greenwashing allegations. Access to reliable data and tools that allow firms to visualise portfolios and investment universes will be critical to succeeding under the new regime.
What does SFDR 2.0 mean for data requirements and estimates?
Although some reporting elements will be streamlined, SFDR 2.0 significantly raises the bar for transparency around data sources and estimation methodologies.
A key provision in the proposal is Article 12a, which requires financial market participants to disclose:
- Whether external data providers are used
- Whether data is based on formalized and documented arrangements
- Whether any estimates rely on documented and consistent methodologies
Clients may also be entitled, upon request, to access more granular information than what is included in standard templates, including details on estimation approaches and the application of the precautionary principle.
Importantly, these requirements apply across asset classes. For private markets in particular, this may translate into more onerous data collection obligations or a greater reliance on specialized data partners.
Will SFDR 2.0 allow firms to design their own sustainability methodologies?
Yes, but within a defined framework.
The proposal allows firms to design their own methodology for demonstrating positive contribution, including the selection of objectives and KPIs. However, this flexibility sits alongside mandatory structural safeguards, including:
- Mandatory exclusions aligned with EU Climate Benchmarks
- A compulsory 70% minimum alignment threshold
- A standardized calculation method for that threshold, to be set by the European Commission
Further detail may emerge in Level 2 measures, which will clarify how this balance between flexibility and standardization works in practice.
What are the most important clarifications expected at Level 2?
Level 2 measures will be critical to making SFDR 2.0 operational.
Key areas requiring clarification include the methodology for calculating the 70% threshold, particularly the treatment of cash, derivatives, hedging, short positions, and sovereign debt. The application of exclusions and the definition of “limited permitted deviations” will also need to be clarified.
Another pivotal element is the design of the mandatory two-page disclosure template, which will determine whether SFDR reporting becomes a genuinely useful tool for investors. Level 2 may also specify which indicators are acceptable for demonstrating positive contribution and what constitutes a credible transition plan for Transition products.
The EU Council and Parliament may still amend the Level 1 proposal. Potential areas of change include entity-level reporting, stronger requirements for non-categorized funds, the treatment of sovereign debt, category naming, the strictness of fossil fuel and defence exclusions, flexibility for insurance and pension products, and grandfathering provisions for existing funds.
How will SFDR 2.0 interact with the EU Taxonomy and Article 9 requirements?
The Taxonomy is referenced extensively throughout the Commission’s proposal. Under the proposed regime, products classified as Sustainable (Article 9) or Transition (Article 7) that pursue environmental objectives must disclose whether and how they use the EU Taxonomy.
Taxonomy-aligned investments of 15% or more automatically satisfy the 70% positive contribution threshold, although exclusions and PAI disclosures still apply.
The Transition category is designed for assets that meet a clear and measurable transition objective related to sustainability factors. Products must meet a 70% transition threshold, apply Climate Transition Benchmark exclusions, and disclose PAIs.
Article 9 products face stricter requirements than before. At least 70% of the portfolio must meet defined sustainability objectives, comply with Paris-Aligned Benchmark exclusions, and disclose PAIs. Funds holding newly excluded assets may need to divest or reclassify as Transition products.
Both Article 7 and 9 products will also need to avoid investments in companies that develop new fossil fuel-related projects or do not have a credible phase-out plan.
Will product-level PAI disclosure still be required under SFDR 2.0?
Yes, but in a more targeted form.
Product-level PAI disclosure will continue to apply to Sustainable (Article 9) and Transition (Article 7) products. These funds must identify relevant adverse impacts and explain actions taken to address them. Mandatory PAI disclosure is not explicitly required for ESG Basics (Article 8) products.
Key changes under the proposal include:
- A voluntary indicator list aligned with SFDR Annex I and ESRS
- Replacement of the Do No Significant Harm test with explicit exclusions and PAI
- Greater flexibility to select indicators relevant to the product strategy
- Simplified, two-page pre-contractual and periodic disclosures
- A voluntary indicator list aligned with SFDR Annex I and ESRS
How is Clarity AI supporting clients through the transition to SFDR 2.0?
While the current SFDR framework will remain in force for several years, it is never too early to begin planning for what comes next.
Clarity AI has launched the SFDR 2.0 Check, a free-to-use tool that provides an indicative view of how existing products in the market could align with the proposed new SFDR categories. Beyond this, Clarity AI is developing a dedicated SFDR 2.0 Category Agent that functions as a partner in navigating the new regulatory framework. Acting as a guide rather than a static screener, the Agent facilitates the entire portfolio construction process, helping users define objectives, analyze portfolio gaps against the new rules, and interpret the context behind specific exclusions.
The solution builds on established datasets such as EU Taxonomy alignment, SDG revenue exposure, PAIs, and Climate Benchmark exclusions, while also introducing new data points to support transition strategies, impact-oriented approaches, and emerging metrics such as fossil fuel expansion and phase-out indicators.
By default, Clarity AI provides full transparency into data sources, methodologies, and assumptions, ensuring that SFDR-related decisions and disclosures are robust, defensible, and aligned with regulatory expectations.
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