SFDR 2.0 – Key Implications for Asset Managers

The European Commission has published the long-anticipated Sustainable Finance Disclosure Regulation (SFDR) 2.0, signaling a major overhaul of the EU’s sustainable finance disclosure framework. This update transitions the regime into a more rigorous product categorisation system, introducing three distinct categories with defined investment criteria.

New Product Categories and Criteria

SFDR 2.0 defines three new categories for financial products, each anchored on two core pillars:

• 70% Threshold: At least 70% of the portfolio must meet the category’s binding sustainability criteria.
• Specific Exclusions: Restrictions on investments in controversial activities, such as tobacco, controversial weapons, fossil fuels, and human rights violations.

A phase-in period is allowed for funds investing in private assets, recognizing initial difficulties in meeting the threshold, but full compliance is required after the phase-in.

1. Transition Funds (Article 7)

• Focus: Target measurable sustainability transitions.
• Criteria: 70% alignment with transition objectives, monitoring indicators, and exclusion of certain sectors.
• Investments may include EU climate transition benchmarks, taxonomy-aligned activities, companies with credible transition plans or science-based targets, and engagement strategies with measurable milestones.

2. ESG Basics Funds (Article 8)

• Focus: Integrate sustainability considerations beyond risk management.
• Criteria: 70% portfolio alignment with ESG strategies and performance monitoring.
• Excludes companies with significant coal revenues and applies social exclusions.
• Investments include outperforming ESG ratings and proven sustainable activities.

3. Sustainability Funds (Article 9)

• Focus: Invest in entities already sustainable or pursuing clear sustainability objectives.
• Criteria: 70% portfolio contribution to sustainability with monitoring and exclusions similar to Transition but stricter, excluding fossil fuel activities.
• Investments may include EU Paris-aligned benchmarks, taxonomy-aligned activities, European Green Bonds, and social entrepreneurship funds.

Practical Implications for Asset Managers

• Raised Bar: The elevated requirements impact fund investment universes, notably tightening the criteria for former Article 8 "light green" funds.
• Exclusion Challenges: Mandatory exclusions may complicate product offerings for global sponsors targeting both EU and US investors.
• Shift from Previous Concepts: "Do no significant harm" and "good governance" are replaced by explicit exclusion criteria.
• Disclosure Simplification: Pre-contractual and website disclosures will be streamlined, reducing complexity.
• Non-Categorised Products: Firms may include ancillary sustainability references only if they are clear, fair, not misleading, and not prominent in names or marketing—replacing prior Article 6 flexibility.
• Entity-Level Disclosures: Principal adverse impact and remuneration disclosures are removed; sustainability risk disclosures remain.
• Grandfathering: No automatic grandfathering exists. Closed-ended funds can opt out, aiding legacy products; open-ended funds face full transition requirements.
• Scope Reduction: Portfolio managers and financial advisers are excluded from SFDR 2.0, raising questions on alignment with MiFID sustainability preferences.
• PRIIPs Adjustments: Key Investor Information Documents (KIIDs) must specify product categorisation and sustainability objectives.

Next Steps

SFDR 2.0 must navigate the EU legislative process, which may yield further modifications. Upon approval, the regulation will be effective 18 months after publication in the Official Journal, indicating that implementation is still some time away.

Conclusion

SFDR 2.0 heralds a significant shift in sustainable finance disclosures for asset managers, with stricter product categorizations, reinforced exclusions, and streamlined disclosures. Asset managers must prepare to adapt product designs, investment universes, and compliance frameworks to align with these rigorous new standards.

Authors: Eve Ellis, Partner, and Tegan Shyne, Associate at Ropes & Gray LLP
Published: November 21, 2025
Source: Ropes & Gray LLP Insights

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.