Design Delight Studio

European Union’s Leaked SFDR 2.0 Proposes Major Overhaul of ESG Fund Regulation

Date: November 9, 2025
Source: Proskauer Regulatory & Compliance Team

Overview

On November 6, 2025, a leaked draft of the European Commission’s updated Sustainable Finance Disclosure Regulation—dubbed SFDR 2.0—emerged, signaling a substantial reset in how ESG (Environmental, Social, Governance) funds are regulated in the EU. This revision aims to simplify the original SFDR framework but introduces pivotal changes, especially for private market funds.

Key Changes and Implications for Private Funds

1. Opt-Out Provision for Professional Investor Funds

• Significant shift: Funds exclusively offered to professional investors may opt out entirely from SFDR 2.0 disclosures in the current draft.
• Impact: This could allow fund managers to avoid mandatory sustainability disclosures or adopt customized ESG frameworks outside SFDR standards.
• Concerns: The lack of standardized rules may increase complexity due to investor-driven demands, creating a "grey zone" of voluntary compliance.
• Eligibility ambiguity: The definition of “professional investors” remains unclear, notably for fund structures involving semi-professional or retail feeder investors.

2. New Product Categorization Model

SFDR 2.0 replaces the existing Article 6, 8, and 9 classification with three new categories, with explicit ESG thresholds and exclusion criteria:

• Transition Products (Article 7):
  Require ≥70% investments aimed at measurable sustainability transitions (e.g., emissions reduction) and exclude “most harmful” sectors based on EU Climate Transition benchmarks.

• Sustainability-Related Products (Article 8):
  Integrate ESG factors in ≥70% of investments without targeting explicit sustainability objectives, also excluding harmful activities.

• Sustainable Products (Article 9):
  The most ambitious category with ≥70% investments in sustainable activities (Taxonomy-aligned), excluding fossil fuel-related companies entirely, demanding measurable social/environmental impact.

All categories will adopt harmonized disclosure templates, naming conventions, marketing rules, and limit use of “impact” terminology to funds pursuing measurable outcomes.

3. Retention of Article 6 Disclosure

Funds in scope or opting in must continue to disclose on sustainability risk integration and its potential impact on returns, akin to current Article 6 requirements.

Notable Omissions in SFDR 2.0 Draft

The proposal excludes several aspects present in current SFDR regulations, including:

• Principal adverse impact reporting at entity and product levels
• Inclusion of portfolio management firms and investment advisers under scope
• Definition of sustainable investment (Article 2(17))
• Taxonomy-related disclosures
• Remuneration policy disclosures

Outlook and Next Steps

While this leak provides crucial insight, SFDR 2.0 remains a draft subject to the EU’s complex legislative process. The ultimate shape and effectiveness will depend on refinement through technical standards and market adoption.

For private market stakeholders, this regulatory pivot could offer increased freedom or introduce nuanced challenges in ESG compliance and investor relations, potentially heralding a pre-SFDR era of deregulation or complexity.

Conclusion

SFDR 2.0 marks a critical evolution in the EU’s sustainable finance policy, emphasizing clearer fund categorization while offering new opt-out flexibility for professional-only funds. Stakeholders should closely monitor legislative developments and prepare for potential shifts in disclosure obligations, ensuring sustainable investing strategies align with both regulatory and market expectations.

For further detailed regulatory analysis and updates on sustainable finance, stay connected to our blog—your trusted source for organic and sustainable market insights.

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