SFDR 2.0: Enhancing Sustainable Finance Labels for Consumers

The European Commission is advancing reforms to the Sustainable Finance Disclosure Regulation (SFDR) with the intent to provide clearer, more reliable product labels reflecting sustainability attributes in investment funds. However, the reforms carry trade-offs between simplification, consumer protection, and market transparency.

Background: Challenges with SFDR 1.0

• SFDR initially sought to standardize sustainability disclosures across three categories:
  • Article 6 (no sustainability focus)
  • Article 8 (promotes environmental/social characteristics)
  • Article 9 (sustainability objective).
• Asset managers had broad discretion in defining these, leading to inconsistencies and market confusion.
• Designations were often mistaken for quality labels, causing misinterpretation by retail investors.

Key Reform Proposals

New Label Framework

• The Commission plans to replace Articles 8 and 9 with three new product labels reflecting sustainability or transition strategies.
• Each label mandates at least 70% portfolio alignment with declared strategies; the rest can be for diversification or hedging without contradicting the label.
• Final label names will be determined after retail consumer testing.
• This aims to clarify standards and improve label usability.

Elimination of the “Sustainable Investment” Definition

• The term “sustainable investment” will be removed to eliminate ambiguity.
• Clarity will instead be derived from precise label guardrails set via delegated acts.
• Striking balance in criteria is crucial to avoid stifling innovation or diluting label integrity.

Removal of Entity-level Principal Adverse Impact (PAI) Reporting

• Entity-level PAI reporting is scrapped due to operational challenges like data gaps and high compliance costs.
• However, dropping this removes visibility into asset managers’ overall sustainability impacts, which is important for retail investors.
• The proposal suggests aligning SFDR reporting with the EU Corporate Sustainability Reporting Directive (CSRD) to maintain transparency through a streamlined set of entity-level sustainability indicators.

Critical Consumer Protection Issues

Fossil Fuel Investment Restrictions

• SFDR 1.0 allowed some fossil fuel developers within “sustainable” funds, compromising credibility.
• SFDR 2.0 introduces tighter exclusions for sustainable/transition labels, banning investments in new coal, oil, and gas projects, and requiring fossil fuel phase-out plans.
• The ESG basics label excludes fewer fossil fuel activities, potentially confusing retail consumers who expect “avoid harmful investments” to exclude fossil fuel developers entirely.

Potential Transparency Decline

• Detailed sustainability disclosures will apply only to labelled products.
• Funds outside the new labels can mention sustainability only tangentially, shrinking the scope of meaningful disclosures.
• Since about half of current EU retail funds fall under Articles 8 and 9, stricter label criteria may reduce the labelled fund universe and thus lower overall market transparency.
• This “transparency cliff edge” may limit asset owners’ ability to evaluate long-term risks comprehensively.

Industry Reactions and Outlook

• Asset managers generally welcome the reforms for reducing administrative burdens and legal risks.
• Asset owners—who depend on broad, comparable sustainability data—have concerns about the potential narrowing of disclosures.
• The success of SFDR 2.0 will depend on:
  • Robust, enforceable label criteria grounded in minimum standards.
  • Ensuring a baseline mandatory disclosure for all products to maintain market transparency.
  • Retail consumer testing to ensure labels are understandable and credible, especially regarding fossil fuel exclusions.

Conclusion

SFDR 2.0 represents an important step toward simplifying sustainable finance product labelling and enhancing consumer trust. However, careful implementation is essential to avoid reduced transparency and weakened consumer protections. Aligning product labels with centralized minimum standards and maintaining baseline disclosures for all investment products will be critical to realizing SFDR’s full potential as a tool for sustainable investment decision-making.

Source: Institute for Energy Economics and Financial Analysis (IEEFA), November 2025
Author: Alasdair Docherty

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.