SFDR 2.0: Key Impacts for Asset Managers
The European Commission has published the long-anticipated SFDR 2.0 regulation, marking a significant overhaul of the Sustainable Finance Disclosure Regulation (SFDR). This update reshapes the EU’s sustainable finance framework by introducing a robust product categorisation regime that mandates stricter disclosure requirements for asset managers.
New Product Categories and Criteria
SFDR 2.0 introduces three new fund categories anchored by two main pillars:
- A 70% investment threshold aligning with binding sustainability criteria
- Specific exclusion rules for certain harmful investments
Asset managers can apply a phase-in period for meeting the 70% threshold, particularly relevant for funds with private asset holdings, but must disclose timelines transparently.
The Three Categories
| Category | Description | Core Investment Criteria & Exclusions |
|---|---|---|
| Transition (Article 7) | Focused on funds with clear, measurable sustainable transition objectives | – 70% of portfolio targets positive sustainability transition.<br>- Excludes tobacco, controversial weapons, human rights violations, significant coal or fossil fuel revenue.<br>- Investments linked to EU climate benchmarks, taxonomy-aligned activities, credible corporate transition plans, and science-based targets. |
| ESG Basics (Article 8) | Funds integrating sustainability considerations beyond risk management | – 70% portfolio integration of ESG factors.<br>- Excludes tobacco, controversial weapons, human rights violations, and significant coal revenue.<br>- Investments with above-average ESG ratings or sustainability performance. |
| Sustainability (Article 9) | Funds investing in sustainable companies or projects | – 70% of investments with positive sustainability contributions.<br>- Excludes tobacco, weapons, human rights violations, fossil fuel activities.<br>- Includes EU Paris-aligned benchmarks, taxonomy-aligned activities, European Green Bonds, and social entrepreneurship funds. |
The regulation also formally recognises impact investing, emphasizing intentionality and measurable outcomes within transition and sustainability products.
Practical Implications for Asset Managers
- Higher Standards: SFDR 2.0 raises the bar from SFDR 1.0, significantly narrowing eligible investment universes, especially impacting former Article 8 (light green) funds.
- Mandatory Exclusions: The stricter exclusion criteria pose challenges, particularly for firms with global investor bases who must carefully navigate divergent jurisdictional demands.
- Simplified Disclosures: Upcoming regulatory technical standards aim to simplify pre-contractual and website disclosure requirements, reducing information overload while maintaining transparency.
- No “Do No Significant Harm” Concept: The previous principle is replaced with explicit exclusion lists, streamlining assessments but narrowing eligible investments.
- Manager-Level Changes: Entity-level principal adverse impact and remuneration disclosures have been removed, though sustainability risk disclosures persist.
Additional Considerations
- Non-Categorised Products: Funds not falling into these categories can reference sustainability tangentially but cannot promote sustainability claims prominently or in fund names.
- Scope Narrowing: Portfolio managers and financial advisers are excluded from SFDR 2.0’s scope, raising questions on interaction with MiFID sustainability preferences.
- Grandfathering: No automatic grandfathering; however, closed-ended funds created before the regulation’s application may opt out, while open-ended funds face full compliance.
Implementation Timeline and Next Steps
SFDR 2.0 must pass the EU legislative process, potentially undergoing amendments. Once approved, the regulation will come into force 18 months after publication in the Official Journal, giving asset managers time to prepare for comprehensive changes.
Conclusion
SFDR 2.0 represents a pivotal shift in the EU’s sustainable finance framework, imposing stricter product classifications, greater transparency, and more precise sustainability criteria. Asset managers should begin assessing their product offerings and investment universes early to align with upcoming regulatory requirements.
Authors:
Eve Ellis, Partner, Ropes & Gray LLP
Tegan Shyne, Associate, Ropes & Gray LLP
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