Overview
SFDR 2.0 proposes the replacement of the existing disclosure regime with formal product categorisations or labels. Specifically, it is proposed to replace the existing Article 8 and Article 9 designations with the following new voluntary categories for sustainability-related financial products:
- Transition (Article 7 of SFDR 2.0);
- ESG Basics (Article 8 of SFDR 2.0); and
- Sustainable (Article 9 of SFDR 2.0).
The proposal also envisages further “Impact” and “Combined” categories. The former would be a sub-category of the Transition and Sustainable categories for products which have as their objective the achievement of a pre-defined, positive and measurable social or environmental impact. The latter contemplates fund of fund products which invest in two or more products which have a combination of two or more of the other categorisations.
A key feature of SFDR 2.0 is that it will include new quantitative thresholds and mandatory restrictions in order for a product to qualify for the new Transition, ESG Basics or Sustainable product categorisations. These are expected to operate in a somewhat similar manner to how the UK FCA’s SDR labelling regime operates.
SFDR 2.0 also provides for a non-exhaustive list of examples of binding elements or constraints through which a product’s suitability for one or other of these categorisations might be demonstrated.
We consider each of the proposed product categorisations and the accompanying mandatory criteria in turn below.
Product categorisations and mandatory criteria
Transition (Article 7)
| Mandatory Criteria | Commentary |
| 1) Minimum 70% threshold in investments that meet a clear and measurable transition objective related to sustainability factors, including environmental or social transition objectives in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicators; 2) exclusion of investments in companies as referred to in Article (12)(1)(a-d) of Commission Delegated Regulation 2020/1818 (the “EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks Level 2 Regulation”); these are the same, narrower mandatory set of exclusions as are in place under the existing ESMA naming guidelines (“ESMA Naming Guidelines”) for funds with a transition-related name (the “SFDR 2.0 exclusions”); 3) exclusion of companies that develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels and companies that develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation; and 4) identification and disclosure of the principal adverse impacts of their investments on sustainability factors and explanation of any actions taken to address those impacts. | The non-exhaustive list of examples of how a product’s suitability for this categorisation might be evidenced includes: i) investment in portfolios replicating or managed in reference to an EU climate transition benchmark or EU Paris-aligned benchmark; ii) taxonomy-eligible economic activities becoming taxonomy-aligned in accordance with Annex I of Delegated Regulation (EU) 2021/2178 (the “Taxonomy Level 2 Regulation”); iii) investment in undertakings or economic activities with a credible transition plan as regards at least one sustainability factor at the level of the undertaking; iv) investment in undertakings or economic activities with credible science-based targets that are supported by information ensuring integrity, transparency and accountability, proportionate to the size of the undertaking; v) investments accompanied with a credible sustainability-related engagement strategy. The principal adverse impacts disclosure requirement will be slightly broader than is currently the case for such funds, in that it attaches to all investments rather than the allocation to sustainable investments only. Moreover, the current disclosure/reporting requirement is to describe how the PAI indicators are “taken into account”. Whereas, the new requirement is to identify and disclose PAIs and to: “explain any actions taken to address those impacts”. It is not yet clear whether this should be understood as an important distinction. It is also of note that the mandatory exclusions that will apply for this categorisation are slightly broader than those which apply to funds with transition-related names under the ESMA Naming Guidelines. We would expect any discrepancy between the current ESMA Naming Guidelines and SFDR 2.0 to be resolved in due course, particularly noting that the ESMA Naming Guidelines have been understood to date by industry as a bridge between the existing SFDR disclosure regime and a formal product categorisation regime (as is now proposed by SFDR 2.0). |
ESG Basics (Article 8)
| Mandatory Criteria | Commentary |
| 1) Minimum 70% threshold linked to the proportion of investments integrating the sustainability factors in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicator(s); and 2) the SFDR 2.0 exclusions. | The non-exhaustive list of examples for how a product’s suitability for this categorisation might be evidenced includes: i) investments with an ESG rating as defined by Regulation 2024/3005 that outperforms the average rating of the investment universe or the reference benchmark; ii) investments that outperform the average investment universe or reference benchmark on a specific appropriate sustainability indicator; iii) investments that favour undertakings or economic activities with a proven positive track record in terms of processes, performance or outcomes related to sustainability factors; and iv) other investments integrating sustainability factors beyond the consideration of sustainability risks, provided proper justification is included in the disclosures required. It is generally expected that this will be the appropriate categorisation for the majority of Irish authorised funds with an Article 8 designation under SFDR currently. |
Sustainable (Article 9)
| Mandatory Criteria | Commentary |
| 1) Minimum 70% threshold linked to the proportion of investments to meet a clear and measurable objective related to sustainability factors, including environmental and social objectives, in accordance with the binding elements of the investment strategy of the financial product, measured using appropriate sustainability-related indicators; 2) exclusion of investments in companies as referred to in Article (12)(1) of the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks Level 2 Regulation; these are the same, mandatory set of exclusions as are in place under the ESMA Naming Guidelines for funds with a sustainability-related name; 3) exclusion of companies that develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels and companies that develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation; and 4) identification and disclosure of the principal adverse impacts of their investments on sustainability factors and explanation of any actions taken to address those impacts. | This is in effect a successor to the existing Article 9 designation. The examples of how a product’s suitability for this categorisation might be evidenced include: i) investments in portfolios replicating or managed in reference to an EU Paris-aligned benchmark; and ii) investments in taxonomy-aligned economic activities as defined in the Taxonomy Level 2 Regulation. |
Reduction and simplification of disclosures
The proposal contemplates a simplification of product-level disclosure templates and a cap of two pages in length for both pre-contractual and periodic disclosures. This is to be welcomed to ensure that such disclosures are targeted, comparable and readily understandable.
What about the existing Article 6 requirements?
Products not categorised under one or other of the proposed SFDR 2.0 categorisations will remain subject to disclosure requirements in relation to the integration of sustainability risks akin to the existing Article 6 SFDR requirements.
The product categories contemplated under SFDR 2.0 are essentially voluntary in nature in the sense that it won’t be the case that a product can only, for example, make sustainability-related disclosures or commitments if it has one or other of the three categorisations.
Funds that do not hold one of the new categorisations won’t be prohibited from providing information on whether and how a fund considers sustainability factors provided that such information: i) is not a central theme of the pre-contractual disclosures of the product; ii) is not included in the PRIIPs KID/UCITS KIID (as applicable); and iii) does not constitute a ‘claim’ within the meaning of the Transition, Sustainable and ESG Basics product categories.
How does the formal proposal vary from the leaked draft?
An earlier draft of SFDR 2.0 leaked to industry on 6 November 2025. Perhaps the key distinctions between the leaked draft and the formal proposal are:
- the formal proposal retains disclosure requirements in relation to principal adverse impacts;
- the leaked draft contemplated the express deletion of the existing EU Taxonomy Regulation requirements that Article 8 and Article 9 products disclose percentage-level Taxonomy-alignment and make certain explanatory disclosure where products do not take the Taxonomy into account. Those deletions are not included in the formal proposal;
- the formal proposal does not include the opt-out for products available for sale to professional investors only; and
- the formal proposal includes exclusion of investments in companies that derive 1% or more of revenues from hard coal or lignite as a mandatory criterion for each of the three main product categorisations (Transition, ESG Basics and Sustainable).
Anti-gold plating
SFDR 2.0 includes an anti-gold plating provision which provides that member states and national competent authorities should not set or apply additional requirements as regards the consideration and disclosures of sustainability risks, or as regards the criteria, procedures, and disclosures concerning the categorisation of sustainability-related financial products. This is welcome to avoid differing interpretations across EU jurisdictions and reflects an increased focus on competitiveness.
Next steps
The proposal is now subject to the EU’s ordinary legislative procedure and may be amended prior to its finalisation. The new regime is expected to apply 18 months after entry into force, meaning it could be 2028 before the new regime takes effect.
It is not yet clear how the transition from the existing SFDR regime to the new SFDR 2.0 framework will be managed.
To discuss any aspect of SFDR 2.0 further, please get in touch with your usual Arthur Cox contact, or a member of our multi-disciplinary ESG Group.