Almost six years after the introduction of its original Sustainable Finance Disclosure Regulation, the European Commission published a much-anticipated proposal for a revised version (SFDR 2.0) on 20 November 2025. The changes aim to simplify transparency rules for sustainability-related financial products and introduces a set of minimum requirements to increase comparability, while continuing to focus on end-investors’ protection.
Less disclosure, more evidence
SFDR was initially designed as a disclosure regime to support investors in directing funds towards sustainable investments. A key objective was also to protect end investors against greenwashing by ensuring that sustainability claims were backed by clear and comparable information. However, in practice the regime introduced complex disclosure requirements lacking clear definition that led to inconsistent interpretations by market participants. This resulted in the regulation not fully meeting its comparability objectives, particularly for retail investors.
The Commission’s proposal for SFDR 2.0 marks a significant change in approach, shifting to a categorisation regime based on a minimum common set of criteria, supported by clear guidance on the type of eligible investments per category.
SFDR 2.0, in the continuity of SFDR 1.0, lets funds categorise themselves and self-certify, with oversight from national regulators. This remains a significant difference with the UK’s Sustainability Disclosure Requirement’s (SDR) labelling regime.
Overall, the proposal entails a simplification and reduction of disclosure requirements while reinforcing the evidence-based requirements to pursue sustainability-related claims.
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Our view
The newly published Level 1 proposal must still undergo ordinary legislative procedures leading to potential significant amendments, and it will need to be supported by an overhaul of the Level 2 measures defining how SFDR is implemented. However, these are our preliminary views on the proposal as it stands.
To read a summary of the proposal itself, click on the button at the end of each topic.
Product categories and underlying criteria
The Article 7 transition category is a much-needed addition. We appreciate the addition of this category reflecting current market trends in sustainable transition investing and our own conviction as a firm. As part of the eligible investment types suggested in the proposal, we particularly support the focus of the term “credible” with an evidence-based investment approach as well as the explicit mention of a “credible transition target set at the level of the portfolio”.
Stricter qualification for Article 8 ESG basics is positive. This category captures products that integrate a variety of ESG investment approaches. We welcome stricter overall qualification requirements, and we expect Level 2 measures to provide clearer guidance on implementing certain criteria and preventing a ‘catch-all’ eligible investment option, which remains a concern for us.
Mandatory exclusions provide a minimum set of requirements increasing comparability but could cause issues for inherently high-emitting industries. The choice to introduce baseline exclusions across categories is a positive step, ensuring clear and comparable minimum requirements. The proposal goes further and is more ambitious than the initial leaked draft, adding the exclusion on companies involved in thermal coal without credible phase-out plans and companies involved in the expansion of fossil fuel activities within the transition category.
As we currently stand, the practical implementation of this exclusion could potentially lead to a general exclusion of the energy sector, undifferentiated between sub-industries such as oil vs. gas. We strongly believe the transition to a decarbonised economy must involve all sectors, including high-emitting industries. We believe a forward-looking transition approach based on evidenced-based and credible data is necessary – rather than exclusion-driven approaches – in order to contribute to real decarbonisation across the economy.
Three new categories would replace the current Articles 6, 8 and 9 disclosure-based classifications:
Transition category (Article 7)
Products designed to allocate capital to companies and/or projects that are not yet fully sustainable but are on a credible path toward becoming sustainable, or investments that contribute towards improvements in the sustainability transition. The transition category can refer to both / either environmental and social objectives.
ESG basics category (Article 8)
Products that integrate a variety of ESG investment approaches but do not meet the specific criteria required for classification under the sustainable or transition categories. Examples could include strategies that prioritise best-in-class performers on selected ESG metrics.
Sustainable category (Article 9)
Products contributing to sustainability goals such as climate, environmental or social targets. This category encompasses investments in companies or projects that are already meeting high sustainability standards.
Article 6a for uncategorised products
These are products where information on sustainability aspects is ancillary by nature and are subject to strict marketing rules.
Minimum alignment threshold. At least 70% of the investment must be aligned with the stated objective based on the product’s category (or the 15% EU Taxonomy alignment threshold for environmental-focused funds).
Mandatory exclusions. A prescribed list of exclusions is required, depending on the product category leveraging the Climate Transition Benchmark (CTB) and the Paris Aligned Benchmark (PAB).
Across the 3 categories, the exclusions should cover:
- Controversial weapons: Companies involved in the production or activities related to controversial weapons are excluded
- Tobacco: Companies involved in the cultivation or production of tobacco are excluded
- UNGC/OECD violations: Companies found in violation of the United Nations Global Compact (UNGC) principles or Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises are excluded
- Coal: Companies deriving 1% or more of their revenue from the exploration, mining, extraction, distribution or refining of hard coal and lignite are excluded.
The transition category must additionally exclude:
- Companies that: (i) develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; or (ii) 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
The sustainable category must additionally exclude:
- Companies that: (i) develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; or (ii) 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
- Fossil fuels investments deriving:
- 1% or more revenue from hard coal/lignite (exploration, mining, etc.)
- 10% or more revenue from oil fuels (exploration, extraction, etc.)
- 50% or more revenue from gaseous fuels (exploration, extraction, etc.).
- Electricity generation: 50% or more revenue from generating electricity with GHG intensity > 100g CO2 e/kWh
Eligible investment types. A prescribed list of eligible investment types to maintain clarity and integrity in product classification.
The inclusion of impact is positive but needs more clarity. While the impact layer is a welcome inclusion, we are concerned that it is presented more as a disclosure ‘add-on’, limiting recognition and clarity around impact strategies. We would like to see stronger safeguards included to define what can be validly described as an impact product.
While there is no dedicated category for impact investing within the new framework, a “sustainability-financial product with impact” is defined and recognised under the transition and sustainable category with an add-on layer for requirements. Specific disclosure and naming requirements related to impact will apply.
70% of investments to align with the specific product category objective is a welcome inclusion. The introduction of a clear quantitative threshold should ensure further comparability between fund managers and is well-aligned with UK and Swiss rules. Transparency from fund managers on how the proportion is measured will be important in improving comparability for end-investors. We also understand the Commission’s overall ambition in using the EU Taxonomy, although we note it is currently under revision as part of the overall Omnibus package to simplify EU corporate sustainability disclosure requirements, and we question how many listed market strategies would in practice be able to benefit from the possibility of using the 15% taxonomy-alignment option instead of the 70% threshold.
Sustainability as an investment objective still requires a clear definition. With the previous definition of ‘sustainable investment’ now removed, the proposed transition and sustainability categories primarily focus on the notion of contribution in defining their sustainability objectives. We believe that a strong and credible framework to assess such contribution remains essential to ensure consistency and integrity across products. Additionally, this framework should be complemented by a holistic assessment of the investment to ensure its solid foundations in terms of potential negative impacts and good governance principles.
The definition of ‘sustainable investment’ has been removed in the revised framework. However, the underlying concepts of the definition (i.e., contribution, do no significant harm (DNSH), good governance) , although simplified, remain embedded within the regulation in prescribed requirements for each product category.
Simplification of do no significant harm enhances flexibility. The new requirements aiming to ensure no harm provide a comparable approach, introducing a baseline set of exclusions coupled with the requirement to still disclose principal adverse impacts (PAI) at product level (albeit in a simplified form).The flexibility to leverage PAIs as currently defined, or choose other indicators, or even perform a qualitative assessment if more appropriate, for the identified impacts is a welcome feature that, while supporting comparability, allows focus on what really matters for the investment strategy.
The concept of DNSH has been simplified under the revised framework by applying a common set of minimum exclusions. Please refer to the list of exclusions in the button above.
For products within the Article 7 (transition) and Article 9 (sustainable) categories, these exclusions are complemented by the use of PAI indicators.
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Simplification of disclosure requirements is helpful. Annual PAI entity-level disclosure lacked comparability and it was of limited use for end-investors while creating considerable operational challenges. The removal of this requirement is welcome. In addition, simplified product-level disclosures should save costs in the long run, but given the initial operational impact, market players will need the implementing acts to be published promptly. It is therefore important that the Level 2 proposal text is published without delay in order for market players to have full visibility on upcoming operational changes.
The revised framework removes the requirement for entity-level principal adverse impact disclosures. In addition, product-level disclosures have been reduced, shortened and simplified through the introduction of product categories.
Coherence with other EU regulations will be key. We note that financial advisers and portfolio management have been removed from the scope of SFDR 2.0. However, these players remain under the scope of MiFID II – for instance through the requirement of collecting sustainability preferences of their clients. Therefore, the scope and the requirements of the various EU sustainable finance regulations will need to be aligned and should come into effect within a similar timeframe to ensure regulatory consistency and effective implementation.
A work in progress
The next step in the process is for the EU Commission to design and publish rules specifying the operational and technical details that will underpin the revised regulation.
With discussions ongoing between the European Commission, Parliament and Council, the final regulatory text for SFDR 2.0 can be expected by the end of 2026. The earliest realistic date for the revised regulation to become applicable is likely to be end of 2028.
Lombard Odier Investment Managers remains engaged on the sustainable finance regulation evolution and will be monitoring these changes closely.
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