On November 20th, 2025, the European Union Commission published a proposal for SFDR 2.0, a comprehensive review of the Sustainable Finance Disclosure Regulation (SFDR). The original SFDR entered into force in March 2021. Almost 5 years later, the Commission now aims to (1) simplify, and (2) make it easier for end investors to understand sustainability aims through an overhaul. In this way, the proposal is very much in line with the broader Omnibus simplification movement in the EU and a continued focus on minimizing greenwashing.
Before assessing whether the Commission will be successful in those objectives, let’s first breakdown the proposal.
Background to the SFDR 2.0 Proposal
The most eye-catching part of the proposal is to transition the SFDR from a disclosure regime to one made of different categories of sustainable funds. The old de facto labels of Article 8 and 9 are gone, and in their place are three sustainable fund categories, each with minimum criteria: transition, ESG Basics and Sustainable (also known as Article 7, 8 and 9 respectively). As a sub-category of Articles 7 and 9, SFDR will, for the first time, recognize impact investing. Impact funds will need to detail their impact theory and measure and report on the investor and financial product contribution. And finally, there is a category for products that combine any elements of articles 7, 8 and/or 9.
Transition (Article 7)
ESG Basics (Article 8)
Sustainable (Article 9)
Each of the categories would be underpinned by criteria split between (1) contribution, (2) negative screening. In this way, while Article 2(17) would be deleted as an article in the regulation, its underpinning principles survive in terms of having to verify that products invest in assets that contribute and limit the amount of harm they do.
For contribution, funds must ensure that 70% of their assets contribute to their given sustainability-related objective. There remains flexibility for funds to choose any metric or KPI, as long as they can justify it to end-investors (e.g. Sustainable Development Goals (SDGs) are mentioned in a general sense related to social goals). The regulation nevertheless makes some more concrete suggestions under each category:
- Transition: Taxonomy eligibility (potential to align), Taxonomy Capex, Taxonomy alignment, credible transition plan, science-based targets, Climate Transition Benchmarks (CBT)
- ESG Basics: ESG ratings, Principle Adverse Indicator, Exclusions, Outperforming benchmarks, CTB
- Sustainable: Taxonomy, Paris-aligned Benchmarks (PaB), EU Green Bonds, Other social or environmental metrics
For negative screening, the proposal draws heavily on the Paris-aligned and Climate-transition benchmark exclusionary criteria, and includes the previous SFDR concept of Principal Adverse Impacts (PAIs).
Transition Funds
- Must adhere to CTB+ exclusions
- Must identify and disclose PAIs and any actions to address the negative impacts
- Must exclude companies that (i) develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; or (ii) develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation
ESG Basics
- Must adhere to CTB+ exclusions
Sustainable
- Must adhere to PAB exclusions
- Must identify and disclose PAIs and any actions to address the negative impacts
- Must exclude companies that (i) develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; or (ii) develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation
Across all three categories there is also a “shortcut”, whereby if a financial product can demonstrate an alignment of 15% to the EU Taxonomy, it can automatically fulfil the contribution criteria under Article 7 or 9.
Elsewhere, the Commission is proposing to delete entity-level PAI reporting (though it remains to be seen what proportion of this will be picked up by Corporate Sustainability Reporting Directive (CSRD) reporting), mandatory reporting of Taxonomy at product level (unless it forms part of the fund’s strategy), and there will be greater scrutiny on the data and estimates being used by the market. Non-categorized – Article 6 – funds will also be limited and not able to make any sustainability-related claims.
Paris Aligned Benchmark exclusions:
(a) companies involved in any activities related to controversial weapons;
(b) companies involved in the cultivation and production of tobacco;
(c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
(d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
(e) companies that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
(f) companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels;
(g) companies that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100g CO2 e/kWh.
Comparison of SFDR 2.0 Categories
Transition Category (Article 7)
Objective
Products supporting transition of undertakings, activities, or assets toward sustainability. Select investments using credible transition plans, science-based targets, or other recognized transition tools.
Contributions
Positive Contribution: ≥70% of investments dedicated to measurable transition objectives.
Exclusions (CTB+ & new fossil fuel capacity):
- Companies involved in prohibited weapons, tobacco, violations of UNGC/OECD principles.
- Companies with ≥1% revenue from hard coal/lignite activities.
- Companies developing new projects for coal, oil, or gas, or lacking a coal/lignite phase-out plan.
PAI: Identify/disclose PAIs and mitigation actions.
Alternative route to contribute: Taxonomy Alignment: ≥15% of investments in Taxonomy-aligned economic activities.
ESG Basics Category (Article 8)
Objective
Products integrating selected sustainability factors beyond sustainability risks but not meeting Sustainable or Transition ambition. Examples: best-in-class or ESG approaches.
Contributions
Positive Contribution: ≥70% of investments integrating sustainability factors.
Exclusions (CTB+):
- Companies involved in prohibited weapons, tobacco, violations of UNGC/OECD principles.
- Companies with ≥1% revenue from hard coal/lignite activities.
Sustainable Category (Article 9)
Objective
Products contributing to sustainability goals (climate, environment, social) by investing in already sustainable companies, assets, or projects. High ambition level.
Contributions
Positive Contribution: ≥70% of investments dedicated to clear, measurable sustainability objectives.
Exclusions (PAB & new fossil fuel capacity):
- Companies involved in controversial weapons, tobacco, violations of UNGC/OECD principles.
- Companies with ≥1% revenue from hard coal/lignite activities (exploration, mining, extraction, distribution, refining).
- Companies that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
- Companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels;
- Companies that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100g CO2 e/kWh.
- Companies developing new projects for coal, oil, or gas, or lacking a coal phase-out plan.
PAI: Identify/disclose PAIs and mitigation actions.
Alternative route to contribute: Taxonomy Alignment: ≥15% of investments in Taxonomy-aligned economic activities.
Timeline for the SFDR 2.0 Proposal
The timeline for SFDR 2.0 is still developing, but the main overhaul and new requirements are not expected to take effect until early 2028. The European Commission launched the legislative proposal in November 2025, which now enters the legislative process with the European Parliament and Council, where it may see further amendments before adoption and implementation
Nov 20,2025
Official legislative proposal for SFDR 2.0 published by the European Commission .
2026-2027
EU-level negotiations and possible amendments. No fixed dates for final approval, as the process depends on the speed of legislative review. Once political agreement is reached, 18 months of transition period.
Early 2028
Earliest expected implementation, following parliamentary approval and publication in the EU Official Journal.
Note 1: there is no change to the current requirements under SFDR until the trilogue negotiation and transition period are finished.
Note 2: Timings are estimated based on previous similar EU processes.
Next Steps for SFDR 2.0: Three Key Changes at a Glance
New fund categories
Minimum contribution & exclusions
Simplified reporting
The Commission’s proposal is only the start of the legislative process. Parliament, Council, and trilogue negotiations may still reshape the details. Once trilogue negotiations conclude, there will be a transition period for the market. There will also be more information on the so-called “level 2” requirements, which will likely detail the templates and any PAI metrics funds should disclose.
In practice, this means two things for financial market participants:
- Be patient: the final rules are not yet settled. Current SFDR requirements remain fully applicable until the transition period begins. Nothing changes yet.
- Prepare early: start working with the new KPIs, exclusion criteria, and data needs so the transition to SFDR 2.0 is smooth.
At Clarity AI, we are closely tracking these developments and adapting in step with the market. As SFDR 2.0 takes shape, our focus is on remaining agile, aligned with regulatory expectations, and ready to support a smooth transition for all market participants.
RELATED FAQs
What is SFDR 2.0?
SFDR 2.0 is the European Commission’s proposed overhaul of the Sustainable Finance Disclosure Regulation, shifting the regime from Article 8/9 labels to three new fund categories: Transition, ESG Basics, and Sustainable. The goal is to simplify disclosures and make sustainability objectives clearer for end investors. The proposal also formally recognizes impact funds for the first time.
When will SFDR 2.0 come into effect?
Nothing changes immediately. The proposal must now move through Parliament, Council, and trilogue negotiations, after which a transition period will be set. Current SFDR requirements remain fully applicable until that process concludes. We do not expect SFDR 2.0 to come into effect until early 2028.
What happens to Article 8 and 9 funds under SFDR 2.0?
Article 8 and 9 labels can be converted into the new categories, each with specific contribution and exclusion criteria. Funds must show at least 70% contribution to a sustainability objective and apply negative screening including strengthened CTB/PAB-style exclusions. Impact funds become a defined sub-category with additional reporting expectations. Article 6 funds will need to ensure they are not making any sustainability-related claims.
Is Taxonomy reporting still required? What about entity level PAIs?
Product-level Taxonomy disclosures would only be required if Taxonomy forms part of a fund’s strategy. A 15% Taxonomy-alignment shortcut allows certain funds to demonstrate contribution for Article 7 or 9 without meeting full criteria. However, scrutiny over data quality and estimates will increase. Entity level PAI reporting would no longer be required. However, PAIs survive at product level both as an option to evidence contribution to a sustainability-related objective, and as a negative screening tool in Article 7 and 9 funds. Via the Omnibus, it will be revealed what entity-level reporting will remain for large FMPs from CSRD.
What does SFDR 2.0 mean for data requirements?
Data expectations rise as funds must demonstrate 70% contribution, validate exclusions, and justify selected KPIs. Estimates and proxies will face closer scrutiny from both regulators and investors.
Will SFDR 2.0 require fund reclassification?
Likely yes. Many Article 8 and 9 products will need to map to the new categories and assess whether they meet contribution and exclusion thresholds. However, reclassification will not be required until the final rules are agreed and the transition period begins. Managers should begin assessing alignment early to ensure a smooth shift.
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