SFDR 2.0: Enhancing Consumer Trust Through Clearer Sustainability Labels

Introduction

The European Commission updates SFDR. They build a new labelling system. This system shows clear sustainability traits. It helps consumers learn about sustainable products. The changes fix old problems with mixed claims. They also balance clear rules with real work.

Background: Problems with SFDR 1.0

Originally, SFDR sorted funds into three groups:

• Article 6: Funds without a sustainability focus.
• Article 8: Funds that promote social or environmental traits.
• Article 9: Funds that aim for a specific sustainability goal.

This set-up let asset managers set their own sustainability rules. It caused mix-ups and confusion. Some funds even put fossil fuel firms under “sustainable” labels. This diluted trust.

Key Proposed Changes in SFDR 2.0

New Labelling System

• The system uses three clear product labels to replace Articles 8 and 9.
• EU recommendations guide each label.
• Each labelled fund must match at least 70% of its portfolio to its stated goal. Up to 30% may be kept for diversification or liquidity.
• Final label names and definitions come after consumer testing.

Removal of “Sustainable Investment” Definition

• The legal definition of “sustainable investment” goes away.
• Clarity now comes from binding label criteria.
• This change sets concrete minimum standards for all funds.

Scrapping Entity-Level Principal Adverse Impact (PAI) Reporting

• Entity-level PAI reports are removed because they were complex and unreliable.
• This step eases the load on asset managers.
• However, it may cut firm-wide transparency.
• To fix this, regulators suggest brief, standardized entity disclosures.
• These disclosures follow the EU’s Corporate Sustainability Reporting Directive and include data on fossil fuel exposure, voting on sustainability issues, and the share of labelled assets.

Fossil Fuel Exclusions Strengthened

• All labels ban hard coal, lignite, controversial weapons, tobacco, and severe norm violations.
• The “sustainable” and “transition” labels further stop companies from starting new coal, oil, or gas projects and require a real fossil fuel phase-out plan.
• The “ESG basics” label may allow best-in-class fossil fuel firms. This choice might confuse some consumers.

Risks and Considerations

Transparency Could Shrink

• Stricter labels may cover fewer funds than Articles 8 and 9 did.
• Funds that do not meet the label criteria could share only extra sustainability details.
• Without mandatory baseline data for all products, overall market transparency might drop.

Consumer Understanding is Critical

• SFDR’s success depends on consumers grasping the labels.
• Buyers need to know fossil fuel exclusion rules and what sustainable investment means.
• Regulators must test labels with retail investors to build trust and ease of use.

Diverging Stakeholder Views

• Asset managers like the changes because they lower reporting work and legal risks.
• Asset owners want consistent data to assess risks and meet duties.
• They may worry that less transparency will harm their decisions.

Conclusion

SFDR 2.0 aims to fix a flexible system by building a clear, enforceable labelling framework. The plan rests on solid minimum standards, strict fossil fuel rules, and keeping enough transparency for all products. If well designed, these reforms could boost trust and drive sustainable investment while sparking further innovation. However, careful balance is needed so that product variety stays healthy and label credibility remains strong.

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.