SFDR 2.0: Enhancing Sustainable Finance Labels for Consumers

The European Commission drives reforms in the Sustainable Finance Disclosure Regulation. It pushes SFDR 2.0 to boost clarity, trust, and ease in using sustainability labels. The aim is to remove inconsistencies and safeguard consumers while keeping asset managers’ work simple.

Key Changes and Their Implications

Introduction of Official Product Labels

• SFDR 2.0 will replace Articles 8 and 9 with three new product labels.
• Each label needs at least 70% of a portfolio to follow a set sustainability or transition strategy.
• The remaining 30% can vary as long as it does not counter the label’s aim.
These changes intend to make rules simple. They depend on clear, enforceable standards to build trust and boost new ideas.

Removal of “Sustainable Investment” Definition

The term “sustainable investment” will be dropped.
Instead, strict label rules in delegated acts will bring clarity.
These acts are set to impose minimum standards at the center.
This change fights past mix-ups, like funds that included fossil fuel developers while claiming sustainability.

Entity-Level Principal Adverse Impact (PAI) Reporting Scrapped

Entity-level PAI reporting has cost high effort and shown little comparability. It will be removed.
This step helps asset managers work with less burden.
In return, there is a risk: retail investors may see less company-level transparency.
To fix this, SFDR 2.0 will match the Corporate Sustainability Reporting Directive. It will add a short set of approved indicators. Examples are:

• How many assets are in labelled products
• The level of fossil fuel developer exposure
• Voting records on climate and social issues
• Shares with strong transition plans

Fossil Fuel Investments: A Test of Label Credibility

Earlier, SFDR 1.0 let fossil fuel developers appear in “sustainable” funds. This choice hurt label trust.
SFDR 2.0 puts a base floor that bans coal, lignite, controversial weapons, tobacco, and clear norm-breakers.
Both sustainable and transition labels also stop companies that plan new fossil fuel projects or do not offer clear phase-out plans.
Yet, the “ESG basics” category might still allow fossil fuel developers. This option may confuse buyers who expect harmful investments to be removed.

Transparency Risks: A Possible Cliff Edge

Under SFDR 2.0, detailed sustainability notes are required only for labelled products.
Funds without labels will mention sustainability factors only in passing.
This change may shrink overall market transparency.
At present, about half of EU retail funds by assets use Articles 8 and 9. With tighter criteria, many managers might drop labels to dodge legal problems.
This shrinkage could cut the amount of comparable data that owners need to assess risks and meet their duties.

Conclusion: Balancing Clarity, Innovation, and Transparency

IEEFA welcomes the shift to official sustainable finance labels in SFDR 2.0. It stresses that:

• Clear, centrally imposed minimum standards are key to building label trust.
• The system must be tried with retail investors to check that labels actually help.
• Transparency must remain strong by keeping basic disclosures for every fund, not just the labelled ones.
• Fossil fuel limits will test overall credibility.

If SFDR 2.0 succeeds, it will give consumers clear, simple sustainability facts while supporting new products and a clear, open market.

Sources

• IEEFA (Institute for Energy Economics and Financial Analysis), November 2025
• European Commission SFDR proposals and EU Platform on Sustainable Finance recommendations
• European Union Corporate Sustainability Reporting Directive (CSRD)

Design Delight Studio curates high-impact, authoritative insights into sustainable and organic product trends, helping conscious consumers and innovative brands stay ahead in a fast-evolving green economy.