SFDR 2.0: Key Impacts and Insights for Asset Managers

The European Commission released SFDR 2.0. This update overhauls the EU’s sustainable finance rules. It shifts from a broad disclosure style to a strict product categorisation one. The aim is to boost transparency and credibility in sustainability claims.

Introduction to SFDR 2.0 Product Categories

SFDR 2.0 brings three new product categories. Each category has clear criteria and exclusion rules. Asset managers must invest at least 70% of a fund in assets that meet these rules. A phase-in period is allowed for private asset funds.

The Three Categories:

1. Transition Funds (Article 7)

   • They target clear sustainability transition goals.
   • They do not include companies tied to tobacco, controversial weapons, human rights issues, or major coal and fossil fuels.

2. ESG Basics Funds (Article 8)

   • They add sustainability aspects to risk management.
   • They avoid sectors that are socially controversial and companies with large coal revenue.

3. Sustainability Funds (Article 9)

   • They invest in assets that are already sustainable or are actively improving.
   • They use strict rules to exclude tobacco, banned weapons, fossil fuels, and high-emission activities. This group also covers EU Paris benchmarks, taxonomy-aligned assets, European Green Bonds, and social entrepreneurship funds.

Practical Implications for Asset Managers

• High Threshold and Narrower Scope:
  SFDR 2.0 sets a higher bar. It narrows the eligible investment universe, especially for funds from the former “Article 8” group.

• Mandatory Exclusions and Global Challenges:
  The new rules require managers to exclude investments in coal and tobacco. Global managers must work harder if they target both European and US investors.

• Changes to Previous Principles:
  The rules now replace "Do No Significant Harm" and "Good Governance" with exact exclusion rules.

• Disclosure Changes:
  Pre-contractual disclosures become simpler. Website disclosures will also be fewer. Products that do not fit any category can mention sustainability only in a limited way and cannot call themselves sustainable.

• Entity-Level Disclosures:
  Managers no longer need to give entity-level details on principal adverse impacts or remuneration policies. However, they must still discuss sustainability risks.

• Grandfathering Rules:
  No product is automatically exempt. Closed-end funds can opt out. Open-ended funds must follow all rules.

• Scope Reduction:
  Portfolio managers and financial advisers are not covered by SFDR 2.0. This change raises questions about aligning with MiFID sustainability preferences.

• PRIIPs Updates:
  Key Investor Information Documents must now show how products are categorised and what their sustainability goals are.

Next Steps and Timeline

SFDR 2.0 is still in the EU legislative process. It might change before it is final. When final, it comes into force 18 months after appearing in the Official Journal. Thus, full implementation will take some time.

Conclusion

SFDR 2.0 tightens the EU sustainable finance rules. Asset managers must now rethink and possibly change their sustainable investment products. The new rules aim to build investor trust with clearer disclosures and stricter exclusions. They also set clear impact investing goals.

Source: Ropes & Gray LLP, “SFDR 2.0 – The Impact for Asset Managers,” November 21, 2025.

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