Leaked SFDR 2.0 draft signals a major overhaul of Europe's disclosure regime
- maiscallan
- 6 days ago
- 4 min read
Updated: 5 days ago
The European Union is preparing to redefine how sustainability is reported in financial markets. The forthcoming revision of the Sustainable Finance Disclosure Regulation (SFDR) - widely referred to as SFDR 2.0 - marks a pivotal moment for sustainable investing in Europe.
A leaked draft of the proposals is circulating and is being described by law-firm Simmons & Simmons as an “ESG earthquake on its way”. This draft indicates that many firms should be preparing now for more substantial change than originally anticipated.
The case for reform
Introduced in 2021, the SFDR was designed as a transparency regime to show how financial institutions integrate sustainability risks and impacts. It deliberately avoided rigid definitions to leave room for market flexibility.
In practice, this flexibility created confusion. With no shared definition of “sustainable investment,” firms adopted inconsistent methodologies, fuelling concerns about greenwashing and comparability. The Article 8 and Article 9 categories - though never intended as labels - became shorthand for sustainability ambition.
Between late 2022 and early 2023, roughly 300–350 Article 9 funds were reclassified as Article 8 (Morningstar), highlighting widespread uncertainty and operational strain.
The European Commission’s 2023 Call for Evidence confirmed several systemic issues:
Unclear definitions, particularly of “sustainable investment.”
Complex templates that confuse rather than inform investors.
Data gaps undermining Principal Adverse Impact (PAI) reporting.
Overlap with related rules like the CSRD and EU Taxonomy.
These weaknesses have driven the push for SFDR 2.0 - a redesign aimed at clearer standards, simpler reporting, and more credible sustainability claims.
What SFDR 2.0 might introduce
The European Commission’s proposal for SFDR 2.0, expected in late 2025, is shaping up to be a complete redesign of the framework. Based on the leaked draft, the familiar Article 8 and 9 system would be replaced with three mandatory product categories, each defined by clearer entry rules and disclosure expectations:
Transition-related objectives - investing in companies on a credible path toward improved environmental or social outcomes (proposed Article 7).
Integration of sustainability-related factors, beyond risk management - (proposed Article 8).
Sustainability-related objectives - funds that explicitly target measurable environmental or social goals (proposed Article 9).
Key features under discussion include:
A minimum 70 % portfolio alignment requirement for products wishing to qualify under a category.
Set exclusions and eligible investment types, tightening the link between product strategy and stated objectives.
No automatic grandfathering for existing Article 8 or 9 funds - managers would need to reassess classification and disclosures.
Streamlined templates for pre-contractual, periodic, and website reporting, potentially capped at two pages.
Stricter naming and marketing rules, limiting the use of terms such as “sustainable,” “impact,” or “transition” to funds meeting defined standards.
Possible scope refinements, with exemptions for professional-investor-only AIFs and lighter requirements for certain advisers and portfolio managers.
If implemented, these reforms would amount to the largest reset of Europe’s sustainable-finance disclosure regime since SFDR’s launch - aimed at improving comparability, clarity, and trust while tackling persistent greenwashing risks.
Investor Stewardship: The missing piece
Investor stewardship - the use of engagement, proxy voting, and active ownership to influence companies - remains a high-level policy concept rather than a detailed regulatory focus in the EU’s sustainable finance framework.
While SFDR and the Shareholder Rights Directive II (SRD II) refer to engagement policies, they stop short of setting expectations for the quality or outcomes of stewardship activity.
In the SFDR 2.0 discussions, NGOs such as ShareAction and WWF have called for stronger recognition of stewardship, but the leaked draft centres on product categorisation and anti-greenwashing measures, not engagement practices. This leaves a clear gap between disclosure and real-world influence - one that future policy could usefully address.
Implementation timeline and industry Impact
According to the European Commission’s 2025 work programme, the SFDR 2.0 proposal is expected in the fourth quarter of 2025. The legislative review by the European Parliament and Council will likely take at least 18 months, with final adoption possible in 2027 and application starting around 2029.
The extended lead time offers firms space to prepare but also underlines the complexity of aligning SFDR with other EU initiatives such as the EU Taxonomy, CSRD, and MiFID II sustainability preferences.
Asset managers may need to reassess product design, marketing language, and ESG data architecture well ahead of formal adoption to ensure continuity and credibility.
Building a strong foundation for the future
Whatever form the final regulation takes, one lesson is clear: sustainability integration must rest on robust evidence and engagement processes. Firms that treat disclosure as a tick-box exercise risk falling behind.
Implementing a comprehensive engagement-management tool such as the Impactive Platform can provide that foundation. By recording interactions with portfolio companies, capturing stewardship outcomes, integrating ESG data and linking these directly to investment decisions, such a system helps demonstrate authenticity. It mitigates greenwashing risk, strengthens reporting, and ensures firms are ready to adapt when SFDR 2.0 comes to effect.
Looking ahead
SFDR 2.0 represents more than a regulatory update - it is a test of Europe’s ability to balance credibility, simplicity, and ambition in sustainable finance.
The revised framework must make sustainability claims both verifiable and comparable without overburdening the market. If successful, it could restore trust and set a new global benchmark for transparency in ESG investing.
Until the final proposal lands, one thing is certain: firms that invest early in data, governance, and engagement systems will be best positioned to thrive in the next era of sustainable finance.
If you would like to find out more about how the Impactive engagement management platform can support your responsible investing function, book a discovery call today.