SFDR 2.0 – What Asset Managers Need to Know

The European Commission has published the long-anticipated Sustainable Finance Disclosure Regulation (SFDR) 2.0, fundamentally reshaping the EU’s sustainable finance disclosure framework. This update shifts from broad disclosure mandates toward a product categorisation regime with clear, binding criteria.

Key Changes: New Sustainable Investment Product Categories

SFDR 2.0 introduces three new product categories, each anchored to a 70% investment threshold and specific exclusion criteria:

1. Transition Funds (Article 7)

• Aim: Support measurable transition objectives toward sustainability.
• Requirement: At least 70% of investments must positively contribute to sustainability transition.
• Exclusions: Tobacco, controversial weapons, human rights violations, coal-heavy or fossil fuel-expanding companies.
• Focus on measurable impact and principal adverse impact disclosure.

2. ESG Basics Funds (Article 8)

• Aim: Integrate ESG factors beyond risk management.
• Requirement: 70% portfolio alignment with ESG strategies.
• Exclusions: Same social exclusions as Transition Funds plus exclusion of coal revenue-heavy companies.

3. Sustainability Funds (Article 9)

• Aim: Invest in clearly sustainable companies, assets, or projects.
• Requirements:
  • 70% portfolio alignment with sustainability objectives.
  • Investment in taxonomy-aligned activities, EU Paris-aligned benchmarks, European Green Bonds, and similar sustainable instruments.
• Exclusions: Broader than others, including fossil fuels and high-emitting energy activities.

Practical Implications for Asset Managers

• Raised Standards: Transitional and ESG Basics funds face stricter investment universe constraints, raising the bar compared to the initial SFDR framework.
• Mandatory Exclusions: Present challenges for global funds aiming for both EU and US markets, necessitating early strategic consideration.
• Simplified Disclosures: Pre-contractual and website disclosure requirements will be significantly streamlined.
• Phase-in Period: Private asset funds can use a disclosed transition period but must meet the 70% threshold by its end.
• Removed Concepts: "Do no significant harm" and "good governance" principles are replaced with firm exclusion criteria.

Additional Notable Updates

• Products Outside the Categories: Limited sustainability references allowed, but cannot be prominent or used in marketing—replacing prior Article 6 flexibility.
• Manager-Level Disclosures: Removal of entity-level principal adverse impact and remuneration policy disclosures; sustainability risk disclosures remain.
• No Automatic Grandfathering: Closed-ended funds created before SFDR 2.0 can opt out, but open-ended funds must transition.
• Entity Scope Narrowed: Portfolio managers and financial advisers excluded from SFDR scope, raising questions on interaction with MiFID sustainability preferences.
• PRIIPs Amendment: Key Information Documents now require sustainability product categorisation and objectives disclosure.

Next Steps and Timeline

The draft regulation will undergo the EU legislative process, potentially amending key elements. Once finalized, SFDR 2.0 will take effect 18 months post-publication in the Official Journal, leaving asset managers time to prepare.

Conclusion

SFDR 2.0 represents a substantive overhaul of the EU’s sustainable finance framework, with clearly defined product categories, stricter thresholds, and exclusion criteria. Asset managers must proactively redesign fund strategies and disclosures to ensure compliance and maintain market competitiveness in a more rigorous sustainability landscape.

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