Design Delight Studio

European Union’s Leaked SFDR 2.0: A Major Redefinition of ESG Fund Regulation

Date: November 9, 2025
Source: Proskauer Rose LLP Legal Analysis

Overview

The European Commission leaked a draft of SFDR 2.0 on November 6, 2025. This draft reshapes the EU sustainable finance rules. It simplifies old rules and changes how ESG funds are labeled and reported. The changes affect private markets and private funds. Each word links tightly to the next so the ideas stay near one another.

Key Changes and Provisions

1. Opt-Out Provision for Private Funds
New rules let funds that serve only professional investors leave SFDR 2.0 completely. Fund managers gain freedom by using their own sustainability ideas. Still, some investors may ask for SFDR-like transparency. This situation may create a grey area with voluntary compliance.

Challenges:

• Definitions of “professional investors” remain unclear, especially for mixed funds.
• Negotiations may grow as standard rules give way to custom deals.

2. New ESG Product Categories
SFDR 2.0 now categorizes products in three groups. It shifts from a model focused on disclosure to one that labels products clearly. The goal is to keep related words and ideas close together.

• Transition Products (Article 7):

  • The fund must invest at least 70% in projects that reduce emissions.
  • The fund cannot invest in sectors seen as “most harmful” by EU climate rules.
  • Funds must show a proper plan with science-based or EU-style targets.

• Sustainability-Related Products (Article 8):

  • Funds use ESG factors in their strategy but do not have set sustainability goals.
  • At least 70% of the investments join ESG ideas, while harmful sectors are off limits.
  • Funds must adopt a clear plan to link ESG indicators into their choices.

• Sustainable Products (Article 9):

  • The goal is direct support for environmental or social aims.
  • At least 70% of the money goes to activities that match Taxonomy or Paris targets.
  • Funds cannot invest in fossil fuels and must show clear social or environmental gains.

Each category uses a fixed template for disclosure. They follow strict naming rules and restrict the use of “impact” to products that show measurable results.

3. Continuation of Article 6 Requirements
SFDR 2.0 keeps the Article 6 rule. Every fund in its scope, or that opts in, must explain how sustainability risks affect returns. The words stay close; risks tie directly to returns.

Notable Removals from Current SFDR

• The reporting for principal adverse impacts is gone at both entity and product levels.
• Portfolio managers and investment advisers no longer fall under SFDR rules.
• The definition of sustainable investment (Article 2(17)) has been removed.
• Disclosure for Taxonomy details and remuneration policies has been dropped.

Implications for the Organic and Sustainable Product Sector

SFDR 2.0 opens new chances and poses some risks:

• For fund managers:
  They now have a more flexible approach, especially for private markets. Still, unclear rules may force them to create custom ESG reports for investors.

• For investors:
  They see clearer product labels. Yet, some funds that opt out or use new definitions can add extra layers of complexity.

• For the broader ESG market:
  The move pushes for more standard sustainability goals. The benchmarks now tie closely to the EU’s climate targets.

Next Steps and Legislative Outlook

The draft still must pass the EU’s legislative process. Expect revisions and debates like those of earlier sustainability rules. The final rules and technical details will change how the rules work day by day.

Summary

SFDR 2.0 marks a clear shift in EU sustainable finance. The focus is on clear product groups, simple disclosure, and more freedom in private markets. Yet, questions remain about scope, enforcement, and real-world use. Those involved in sustainable investment and organic products should watch these changes closely to meet new rules.

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