SFDR 2.0: Enhancing Sustainability Labels for Consumers

The European Commission’s proposed reforms to the Sustainable Finance Disclosure Regulation (SFDR), termed SFDR 2.0, aim to improve how sustainability information is presented to investors, especially retail consumers. The Institute for Energy Economics and Financial Analysis (IEEFA) welcomes this initiative but highlights key considerations to ensure consumer trust, market transparency, and operational feasibility.

Key Changes and Their Implications

1. Introduction of Official Product Labels

• Replacing Articles 8 and 9: SFDR 2.0 proposes three new product categories to replace the existing Article 8 (environment/social characteristics) and Article 9 (sustainable objective) classifications.
• Label Criteria: At least 70% of a fund’s portfolio must meet the label’s sustainability or transition criteria, with the remaining 30% reserved for diversification and liquidity.
• Goal: Simplify and standardize fund labelling to help investors better understand sustainability profiles.

2. Removal of “Sustainable Investment” Definition

• The previous definition led to inconsistencies and loopholes, such as fossil fuel developers being included under sustainable funds.
• SFDR 2.0 removes this definition, placing the onus on clear and enforceable label criteria instead.
• Effectiveness depends on the delegated acts that translate label concepts into strict minimum standards.

3. Scrapping Entity-Level Principal Adverse Impact (PAI) Reporting

• Current PAI reporting is criticized for high operational costs, inconsistent methodologies, and limited transparency.
• While eliminating this reporting reduces compliance burdens, it risks diminishing key visibility about asset managers’ sustainability performance.
• IEEFA suggests replacing entity-level reporting with a concise, standardized disclosure layer aligned with the Corporate Sustainability Reporting Directive (CSRD).
• Suggested metrics include:
  • Percentage of assets in labeled vs. unlabeled products
  • Exposure to fossil fuel developers
  • Voting behavior on climate and social issues
  • Assets backed by credible transition plans

4. Fossil Fuel Exclusions and Label Integrity

• SFDR 1.0 allowed fossil fuel developers in some sustainable funds, undermining trust.
• SFDR 2.0 enforces stricter exclusions for new coal, oil, and gas projects in "sustainable" and "transition" fund categories.
• The "ESG basics" category maintains only baseline exclusions, potentially allowing fossil fuel developers deemed "less harmful" — a nuance consumers are unlikely to grasp.
• This treatment of fossil fuels will serve as a critical test of SFDR 2.0’s credibility.

5. Risk of Reduced Market Transparency

• Under the new regime, detailed sustainability disclosures apply only to labeled funds.
• Non-labeled funds can only mention sustainability factors marginally, potentially shrinking the universe of funds with meaningful sustainability information.
• As stricter labeling criteria may deter managers from labeling less compliant funds, transparency across the EU fund market could decline.
• Since Articles 8 and 9 currently cover about 50% of assets and 60% of funds, the risk is a "transparency cliff" where investor information narrows at the same time label robustness increases.
• Asset owners, who need broad market data for fiduciary duties, may view this reduction unfavorably, contrasting with asset managers’ positive reception of lower reporting burdens.

Conclusion: Balancing Clarity, Credibility, and Coverage

While SFDR 2.0 promises simplification and potentially stronger sustainability standards, its success depends on:

• Establishing clear, enforceable label criteria that maintain space for product innovation.
• Preserving baseline disclosure requirements that provide visibility across the entire fund universe.
• Prioritizing consumer understanding through retail investor testing, especially around fossil fuel exclusions.
• Harmonizing entity-level disclosures with existing corporate sustainability reporting to balance transparency and operational efficiency.

IEEFA urges regulators to ensure that SFDR 2.0 genuinely empowers consumers by providing trustworthy, accessible information on where their money is invested, without sacrificing market-wide transparency.

Reference:
IEEFA, “SFDR 2.0: Making labels work for the consumer,” November 20, 2025. IEEFA Newsroom

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