In brief
On 20 November 2025, the European Commission published its legislative proposal to revise Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (the Sustainable Finance Disclosure Regulation (SFDR)). This legislative proposal is commonly referred to as SFDR 2.0. This initiative seeks to simplify sustainability disclosures, enhance investor protection and reduce compliance burdens, aligning with the European Commission’s Omnibus I Package.
SFDR 2.0 introduces a new categorization system for environmental, social and governance (ESG) products, repeals the current SFDR Regulatory Technical Standards (RTS), removes certain entity-level obligations and amends the PRIIPs Regulation to ensure consistency in disclosures to retail investors. If adopted, these changes will significantly reshape compliance strategies for the actors of the fund industry.
The proposal will now continue through the usual legislative procedure in the European Parliament and the European Council. The proposal will apply 18 months after it enters into force, making 2028 the current timeline for implementation.
The European Commission’s review responds to criticism that the SFDR is overly complex and has been implemented by asset managers and is viewed by investors as a “de facto labeling system,” creating confusion and increasing compliance costs without achieving the intended transparency.
New product categorization regime
The proposal replaces the current Article 8 and Article 9 classifications by product categories, each subject to strict eligibility criteria:
Transition category: financial products supporting a credible pathway toward sustainability and contributing to measurable improvements in climate, environment or social areas
Sustainable category: financial products pursuing a defined sustainability objective
ESG basics category: financial products that integrate ESG considerations beyond mere risk management but do not meet the criteria of the two categories above
Each category requires the following:
A minimum 70% investment commitment aligned with the category’s objective
Mandatory exclusion from harmful industries and activities across the entire portfolio
New disclosure framework and marketing restrictions
Pre-contractual, website and periodic disclosures will remain, but their format will be significantly simplified. Disclosure templates will be shorter (capped at two pages) and designed to provide clear, comparable information for investors: the current SFDR RTS will be repealed, dismantling the current template-based disclosure system and replacing it with a flexible architecture aligned with the categorization regime.
The proposal also reinforces marketing rules: Only products that qualify under one of the new categories will be permitted to use sustainability-related terms in their names or promotional materials. Products outside the categorization framework may still provide limited ESG information but cannot make sustainability claims without abiding fully to the new categorization framework.
Simplification and removal of duplicative requirements
The proposal eliminates the requirement for financial market participants to disclose how they consider principal adverse impacts of investment decisions on sustainability factors. This addresses overlaps with the Corporate Sustainability Reporting Directive.
The definitions of “sustainable investment” and the “do no significant harm” principle would also be deleted.
Taxonomy-related disclosures would be adjusted. They will be optional, except for products in the transition or sustainable categories that have an environmental objective. To incentivize taxonomy use, the proposal provides a safe harbor: Products investing at least 15% of assets in taxonomy-aligned activities will be deemed to meet the 70% positive contribution threshold required for inclusion in the sustainable or transition categories.
The proposed changes will have substantial operational and strategic consequences for banks, asset managers, investment advisers and other financial market participants.
Undertakings should do the following:
Map all products making ESG-related claims to the proposed categories to determine eligibility and compliance requirements
Assess whether existing Article 8 and Article 9 products should transition into one of the three new categories or, alternatively, provide ESG information outside the categorization framework as permitted under the new regime
Enhance product governance processes to ensure that all sustainability claims are clear, fair and not misleading, supported by robust and verifiable data
Revise prospectuses and key information documents (KIDs) to reflect the new categories, mandatory exclusions and disclosure templates
Ensure consistency across all investor-facing materials, including prospectuses, PRIIPs KIDs, private placement memoranda, websites and marketing collateral
Review naming conventions and marketing strategies, as the prohibition on sustainability-related terms for products outside the new categories will require significant adjustments to branding and promotional materials
The proposal will follow the usual legislative procedure in the European Parliament and the European Council. The proposal will apply 18 months after it enters into force, making 2028 the current timeline for implementation.
Market participants should anticipate further technical standards and guidance from the European supervisory authorities to adjust to the new framework.
In Luxembourg, firms should expect the CSSF to update its SFDR FAQ and possibly issue new guidance to align with the revised EU framework.
