The Sustainable Finance Disclosure Regulation has a problem. Since its Level 2 measures entered into application in January 2023, financial market participants, supervisors, and investors have struggled with a framework that produces disclosures nobody reads, classifications that are widely misunderstood, and a product labelling system that was never meant to be one.

On 20 November 2025, the European Commission published its legislative proposal to revise SFDR — an initiative known in the industry as "SFDR 2.0." The proposal is part of the Commission's broader Savings and Investments Union package and follows two years of consultation, targeted review, and significant political pressure to simplify the EU's sustainable finance disclosure architecture.

This guide explains what the Commission has proposed, how it differs from the current framework, what it means for fund managers and financial advisers, and what you should — and should not — do now.

Why the Commission Decided to Revise SFDR

The case for revision was built on three documented failures of the current framework.

1. Disclosures Are Too Complex

The Level 2 RTS under Commission Delegated Regulation (EU) 2022/1288 prescribes standardised templates — Annexes II through V — that run to dozens of pages per product. The Commission's review found that these templates are:

Too long and too technical for retail investors to understand
Poorly suited to comparison across products or providers
Often completed by legal and compliance teams without meaningful input from investment managers, resulting in generic language that does not reflect actual portfolio characteristics

ESMA's 2025 Common Supervisory Action confirmed the Commission's assessment: regulators found widespread deficiencies in the quality of SFDR disclosures, including inadequate DNSH analyses, boilerplate PAI disclosures, and inconsistencies between pre-contractual documents and actual investment strategies.

2. Article 8 and Article 9 Have Become Informal Labels

SFDR was never designed to create a product labelling system. The current framework establishes disclosure requirements for products that promote environmental or social characteristics (Article 8) or that have sustainable investment as their objective (Article 9). The regulation provides no definition of what makes a product "sustainable" in a consumer-facing sense.

In practice, Article 8 and Article 9 became informal labels. The market adopted "light green" and "dark green" as shorthand, asset managers marketed their Article 9 funds as the highest category of sustainable investment, and retail investors interpreted the classification as a quality or impact rating rather than a disclosure trigger.

This created three interconnected problems:

Greenwashing risk: Products classified as Article 9 were marketed as comprehensively sustainable but could not always substantiate those claims, leading to the wave of Article 9 to Article 8 reclassifications in 2022–2023 (over €175 billion in assets reclassified)
Competitive distortion: Managers that were careful and accurate in their Article 8 classification appeared less "sustainable" than competitors that overclaimed Article 9 status
Investor confusion: Retail investors, in particular, treated Article 8/9 as product quality ratings rather than disclosure category markers

3. The Framework Is Disconnected from Investor Needs

A study commissioned by the Commission found that retail investors could not identify whether specific products were Article 8 or Article 9, could not interpret the PAI indicator tables in periodic reports, and often made investment decisions based on fund names and marketing materials rather than SFDR disclosures.

The framework's entity-level disclosures (Article 3, 4, and 5 — sustainability risk policies, PAI statements, remuneration policies) placed a significant burden on smaller managers while generating information of limited practical use to investors.

What the Commission Has Proposed

The November 2025 proposal addresses three structural issues in the current framework: the informal labelling problem, the complexity of disclosures, and the disconnect between disclosures and investor utility. While the full legislative text is subject to revision by the Council and Parliament, the core elements of the Commission's proposal are:

1. Replacing the Article 8/9 Framework with a Formal Product Categorisation System

The centrepiece of the SFDR 2.0 proposal is the replacement of the informal Article 8/9 classification with a mandatory product categorisation regime based on clearly defined sustainability criteria.

The Commission's proposal introduces three categories for financial products integrating sustainability:

Category 1: "Sustainable"

Products in this category have sustainable investment as their primary objective. This replaces the current Article 9 category but with a key difference: the "Sustainable" category will require a minimum proportion of assets (expected to be significantly high — likely 70% or more) to meet defined sustainability criteria, replacing the current Article 2(17) definition with criteria that are more closely aligned with the EU Taxonomy Regulation and verifiable through objective data sources.

The proposal is designed to make the "Sustainable" category legally meaningful in a way that Article 9 never fully was. Rather than leaving "sustainable investment" to be self-defined by each asset manager, the "Sustainable" category will specify minimum alignment thresholds and data requirements.

Category 2: "Transition"

This is an entirely new category that does not exist in the current SFDR framework. "Transition" products invest in economic activities that are not yet sustainable but are on a credible path toward meeting the criteria for environmental or social sustainability. This category is designed to capture the growing universe of "brown-to-green" strategies — investments in high-emitting sectors undergoing credible decarbonisation, for example.

The absence of a "transition" category in the current SFDR was one of the most frequently cited structural gaps in the Commission's review process. Under the current framework, a fund investing in companies undergoing ESG transformation either had to classify as Article 8 (with limited disclosure requirements about the transition strategy) or avoid any sustainability label altogether.

The "Transition" category requires:

A clear articulation of the transition pathway — how are portfolio companies expected to improve?
Minimum engagement requirements — active stewardship must be a defined feature of the investment strategy
Progress reporting — how are assets tracked against their transition milestones?

Category 3: "ESG Collection" (working title)

This category applies to products that integrate ESG factors systematically but do not aim for sustainable investment or transition as their primary objective. It replaces the bottom portion of the current Article 8 spectrum — products that apply ESG screening, integration, or tilts but do not promote specific environmental or social characteristics as binding investment commitments.

The "ESG Collection" category is designed to give market participants who genuinely integrate ESG a category without requiring them to make the stronger claims of the "Sustainable" or "Transition" labels.

Products that do not fall into any of the three categories — traditional, non-ESG-integrated products — are not required to use the categorisation system and will instead use a simplified sustainability disclosure.

2. Simplified Disclosure Architecture

Alongside the categorisation reform, the proposal significantly simplifies the disclosure requirements for all categories.

Removal of entity-level PAI disclosure (Article 4)

The obligation on financial market participants with more than 500 employees to publish annual entity-level PAI statements is removed. This disclosure generated significant cost, produced data that was rarely read by investors, and duplicated information increasingly available through CSRD corporate disclosures.

Under SFDR 2.0, PAI considerations are embedded at product level — product disclosures must explain how the product avoids adverse sustainability impacts — rather than being reported at entity level.

Shorter, layered product disclosures

The proposal replaces the lengthy Annex II–V templates with a two-layer model:

Summary disclosure (to appear in pre-contractual documents): a standardised, short-form summary — the Commission is considering a one- to two-page format — that enables investors to compare products across the three categories on consistent metrics
Full disclosure (available separately): detailed methodology, data sources, screening criteria, and sustainability indicators, accessible via website link or on request

This layered approach mirrors the structure of the PRIIPs Key Information Document (KID) — a brief investor-facing summary supplemented by detailed information for those who want it.

Simplified periodic reporting

Annual periodic reports will be reorganised to focus on two questions: (1) did the product deliver on the sustainability commitments made in pre-contractual disclosures? and (2) what are the material sustainability impacts of the portfolio? The current Annex IV and V templates are replaced with shorter, standardised formats.

3. Strengthened Anti-Greenwashing Measures

The proposal introduces explicit anti-greenwashing provisions that go beyond what the current SFDR framework provides:

Name restrictions: Financial products may only use sustainability-related terms in their name (e.g., "sustainable," "green," "ESG," "responsible," "impact," "low-carbon") if they fall within one of the three product categories. This codifies and extends ESMA's existing Guidelines on Fund Names (applicable since November 2024) into primary legislation
Marketing consistency requirement: Marketing communications must be consistent with the product's SFDR 2.0 category disclosure — claims in marketing materials that exceed or contradict the categorisation will constitute a regulatory breach
Supervisory cooperation: The proposal strengthens the mandate for NCAs to share information on greenwashing investigations, enabling coordinated supervisory action across borders

4. Streamlining the Interaction with Other Frameworks

The current SFDR framework intersects — and often conflicts — with the EU Taxonomy Regulation, MiFID II sustainability preference requirements, the Benchmarks Regulation, and CSRD. The SFDR 2.0 proposal makes several alignment changes:

Taxonomy alignment: The "Sustainable" category will reference EU Taxonomy-aligned revenue or capex as one permissible method for meeting the sustainability criteria threshold, creating a clearer hierarchy between SFDR and the Taxonomy
CSRD data: As CSRD corporate sustainability disclosures become available from 2025–2026, the SFDR 2.0 framework will use standardised CSRD data as a primary data source for product-level sustainability indicators, reducing reliance on estimated and third-party data
MiFID II sustainability preferences: The current MiFID II sustainability preference regime — which requires investment advisers to assess client preferences against SFDR classifications, Taxonomy alignment, and PAI consideration — will be updated to align with the new SFDR 2.0 categories. Note that the EU Retail Investment Strategy (RIS) also amends MiFID II distribution rules simultaneously, creating overlapping reforms that distributors of sustainable products must track in parallel.

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What SFDR 2.0 Does NOT Change

It is important to be precise about what the proposal does not do:

SFDR 2.0 does not eliminate disclosure requirements. Financial market participants will still be required to disclose sustainability-related information for products in all three categories. The reform simplifies how this information is presented, not whether it must be disclosed.
SFDR 2.0 does not affect the EU Taxonomy Regulation. The Taxonomy framework — Regulation (EU) 2020/852 and its delegated acts — is a separate legal instrument with its own legislative trajectory.
SFDR 2.0 does not create a "green label" for products. The new categories are still disclosure categories — they tell investors what a product aims to achieve, not whether it will achieve it or whether it is "better" than other products.
SFDR 2.0 does not apply yet. The current SFDR framework — including Article 8, Article 9, the RTS templates, and all associated disclosure obligations — remains fully in force. Firms that are non-compliant with the current framework cannot rely on the forthcoming revision as a defence.

Timeline: When Does SFDR 2.0 Apply?

The legislative timeline for SFDR 2.0 involves several stages:

Stage	Expected Timing
Commission proposal published	November 2025
Council of the EU position	2026
European Parliament position	2026–2027
Trilogues (co-decision)	2027
Adoption and Official Journal publication	Late 2027
Entry into force	20 days after publication
Application date (typically 12–18 months after entry into force)	2028–2029
Level 2 RTS under SFDR 2.0 (ESAs to develop)	2029–2030

The realistic application date for SFDR 2.0 is 2028 at the earliest — 2029 is more likely. There will be transitional arrangements enabling funds to reclassify from the current Article 8/9 framework into the new categories, but the details of those transitional arrangements will not be known until the final legislative text is adopted.

What Fund Managers Should Do Now

Given the realistic timeline, the practical implications for asset managers, UCITS management companies, and AIFMs are:

Short term (now to 2027): Comply rigorously with the current SFDR framework

NCAs are enforcing the existing rules. ESMA's 2025 Common Supervisory Action found material deficiencies at a significant proportion of firms inspected. Regulatory action — disclosure amendments, marketing restrictions, fines — will increase, not decrease, in the period before SFDR 2.0 takes effect.

Priority actions under the current framework:

Verify that Article 8 classifications are substantiated by binding investment strategy elements — aspirational ESG language in marketing materials is not sufficient
For Article 9 products: verify that substantially all portfolio holdings meet the Article 2(17) sustainable investment definition and that DNSH analyses are documented for every investment
Ensure PAI disclosures are product-specific rather than generic — boilerplate language is the most frequently cited deficiency
Align fund names with ESMA's Guidelines on Fund Names (applicable since November 2024) — any fund using sustainability-related terms in its name must satisfy the applicable quantitative threshold (80% for ESG/sustainability-related terms, 50% for impact-related terms)

Medium term (2027–2028): Prepare for reclassification

When the SFDR 2.0 framework nears its application date, fund managers will face a reclassification exercise: assigning each existing product to one of the three new categories ("Sustainable," "Transition," or "ESG Collection") or confirming that the product does not fall within any category.

Preparation steps:

Map your current product range against the proposed SFDR 2.0 criteria — which products are likely to qualify as "Sustainable," which as "Transition," which as "ESG Collection"?
Identify investment strategy changes that would be required to qualify for the target category — and whether those changes are commercially viable and investor-approved
Engage with legal counsel on the operational steps required to change SFDR classification: fund documentation amendments, investor notifications, NCA notifications (where required by national law)

Ongoing: Monitor the legislative process

The SFDR 2.0 proposal is in the early stages of EU co-decision. The Council and Parliament will each develop positions, and trilogues will produce a final text that may differ materially from the Commission's proposal. Key issues where the legislative text may change:

The specific criteria and thresholds for each product category (the 70% minimum commitment threshold for "Sustainable" may be adjusted)
Whether the "ESG Collection" category survives or is collapsed into the "Transition" category
The scope and format of the simplified disclosure templates
The interaction with MiFID II sustainability preferences and the extent to which advisers will need to update their suitability processes

Monitor ESMA, EBA, and EIOPA consultations as they begin developing technical standards to underpin the new framework.

How This Relates to the Existing SFDR Article 8 vs Article 9 Framework

The proposed SFDR 2.0 categories broadly map to the existing classification as follows:

Current SFDR	Proposed SFDR 2.0	Key Difference
Article 9	"Sustainable"	More prescriptive sustainability criteria; minimum asset proportion specified; Taxonomy alignment as verification method
Article 8 (with sustainable investments)	"Transition" or "Sustainable" depending on strategy	New "Transition" category captures brown-to-green strategies that do not fully qualify as "Sustainable"
Article 8 (without sustainable investments)	"ESG Collection"	Formal category with binding ESG integration requirement
Article 6	No SFDR 2.0 category	Simplified sustainability disclosure only

The most significant impact will be on funds currently classified as Article 8 without a sustainable investment commitment. Under the current framework, these funds need only promote E/S characteristics through binding investment strategy elements. Under SFDR 2.0, they will face a choice: qualify for the "ESG Collection" category (which may have its own criteria to meet), qualify for "Transition" (if the strategy has a transition angle), or exit the SFDR product categorisation framework entirely.

For a detailed analysis of current SFDR obligations, see our SFDR Article 8 vs Article 9 Classification Guide.

How financialregulations.eu Can Help

Our platform covers both the current SFDR framework and the Commission's SFDR 2.0 proposal. You can:

Query the current framework: What are the DNSH requirements for an Article 9 fund investing in a high-emitting sector? What binding investment strategy elements are required to maintain Article 8 classification?
Analyse the proposal: What does the Commission's proposal say about the "Transition" category criteria? How does the simplified disclosure template differ from current Annex II requirements?
Review documents: Upload your current SFDR disclosures, sustainability risk policy, or PAI statement and get them analysed against both the current requirements and the direction of SFDR 2.0

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Frequently Asked Questions

When will SFDR 2.0 replace Article 8 and Article 9?

The Commission published its legislative proposal in November 2025. Given the EU co-decision process — Council and Parliament positions, trilogues, adoption, and a transition period — SFDR 2.0 is not expected to apply before 2028, and 2029 is the more realistic application date. The current SFDR framework remains fully in force until then.

Do I need to reclassify my Article 8 or Article 9 funds now?

No. The current SFDR framework remains fully applicable. You should not reclassify products in anticipation of SFDR 2.0 — any reclassification must be justified under the current rules (a genuine change in investment strategy, correcting a prior misclassification, or responding to supervisory guidance). Speculative reclassification in anticipation of SFDR 2.0 categories is not a recognised basis under the existing framework.

What happens to the Article 8 and Article 9 labels under SFDR 2.0?

The Commission's proposal removes the Article 8/9 classification framework and replaces it with the three new categories ("Sustainable," "Transition," and "ESG Collection"). When SFDR 2.0 takes effect, financial market participants will be required to use the new categories in pre-contractual disclosures and periodic reports. The "Article 8" and "Article 9" labels will cease to be regulatory categories, though they may persist informally in market usage during the transition period.

Is the "Transition" category the same as an Article 8 fund that invests in companies transitioning to sustainability?

Not quite. Under the current SFDR, a fund investing in companies transitioning to sustainability can be classified as Article 8 if it promotes E/S characteristics, but the framework does not specifically accommodate the "transition" investment thesis. The proposed SFDR 2.0 "Transition" category is designed specifically for strategies that invest in companies on a credible transition pathway — it requires active stewardship, defined transition milestones, and progress reporting. It is a more specific and demanding category than a simple Article 8 ESG integration strategy.

Does SFDR 2.0 remove the obligation to consider Principal Adverse Impact indicators?

The Commission's proposal removes the entity-level PAI statement obligation for large financial market participants under Article 4. Product-level PAI consideration is embedded within the new category framework rather than being a standalone disclosure obligation. However, the substantive obligation to avoid significant adverse impacts on sustainability factors — the DNSH principle — is retained and strengthened in the "Sustainable" and "Transition" categories. PAI is not eliminated; it is restructured.

How does SFDR 2.0 interact with MiFID II sustainability preferences?

The current MiFID II sustainability preference regime (under Commission Delegated Regulation (EU) 2021/1253) asks investment advisers to assess clients' preferences in terms of SFDR classification (Article 8/9), Taxonomy alignment, and PAI consideration. When SFDR 2.0 replaces the Article 8/9 classification, the MiFID II framework will also need to be updated. The Commission is expected to make consequential amendments to the MiFID II delegated regulations to align with the SFDR 2.0 categories. Advisers should monitor these updates as they are published.

SFDR 2.0: What the European Commission's Proposed Overhaul Means for Fund Managers