The Sustainable Finance Disclosure Regulation (SFDR) is one of the pillars of sustainable finance in Europe. Its main objective is to increase the transparency of financial products in terms of sustainability, to help investors make informed decisions and combat greenwashing. This regulation requires financial actors to provide detailed information on the integration of ESG (environmental, social and governance) criteria into their investment strategies.
SFDR: The Current Regulation
The SFDR, which came into force in March 2021, introduces a classification of financial products based on their degree of ESG integration. These products are divided into three categories:
- Article 6: Financial products that do not take ESG criteria into account.
- Article 8: Products that promote environmental and/or social characteristics.
- Article 9: Products with a sustainable investment objective (environmental or social).
Financial market participants must disclose, in their pre-contractual documents and on their websites, the level of integration of ESG criteria in their financial products. This ensures greater transparency and allows investors to understand precisely how ESG criteria influence investment decisions.
Upcoming changes: SFDR 2.0
The SFDR regulatory framework is evolving with the ongoing revision to SFDR 2.0, which aims to enhance clarity and transparency and simplify certain processes. Here are the main changes expected:
1. Changes to the scope
In SFDR 2.0, certain players and activities, such as financial investment advisers (FIAs), discretionary management, and certain professional funds benefiting from the opt-out, will fall outside the scope of the revised SFDR. This reduces the scope of the regulation, allowing for greater specialisation of the rules for the players concerned.
2. Revision of transparency requirements
- Removal of Principal Adverse Impact (PAI) disclosure requirements at entity level (for PMCs): Article 7, which required fund managers to publish information on the adverse impacts of their investment decisions and to keep this information up to date on their website, will be removed in SFDR 2.0. This requirement applied to entities with more than 500 employees.
- Removal of ESG risk integration in remuneration policy: This obligation, which proved complex to implement for some companies, will also be removed, thereby reducing the administrative burden on fund managers.
3. New product categories and exclusion of unsustainable sectors
SFDR 2.0 introduces clearer and more harmonised exclusion criteria and minimum thresholds at European level. These rules are based on two main principles:
- An exclusion criterion: Defines sectors and activities that are incompatible with the category claimed by the product.
- A positive contribution criterion: Requires that at least 70% of the portfolio be aligned with an ESG strategy consistent with the product’s claim.
This approach marks a shift from SFDR 1.0, where sustainability was based more on internal methodologies and qualitative statements.
Three Product Categories, Three Levels of Requirements
In SFDR 2.0, these criteria will be applied differently according to three new categories of financial products.
- “Sustainable” products (Article 9)
Sustainable products are subject to the most stringent requirements. They exclude investments in:- Companies involved in the tobacco industry or in the production of prohibited weapons.
- Those found guilty of human rights violations.
- Companies involved in fossil fuels or high-carbon energy activities.
- Companies expanding their fossil fuel-related activities.
In addition, 70% of the portfolio must be aligned with a strategy aimed at making a measurable contribution to sustainability, and this performance must be monitored and published regularly.
- Transition products (Article 7)
Transition products support companies in their transition to more sustainable practices. They exclude the same sectors as sustainable products, but with less stringent criteria for fossil fuel-related sectors.
70% of the portfolio must be aligned with a measurable transition strategy towards more sustainable practices.
- “Core ESG” products (Article 8)
This category includes products that incorporate ESG criteria without an explicit sustainability or transition objective. They exclude social sectors (tobacco, controversial weapons, human rights violations) and companies that derive significant revenue from coal.
70% of the portfolio must be aligned with an overall strategy for integrating ESG factors.
4. Removal of the DNSH principle
The DNSH (Do No Significant Harm) principle, which required ensuring that an investment did not undermine other environmental or social objectives, will be withdrawn due to implementation challenges and concerns over greenwashing. However, managers will still be required to be transparent about how they assess the sustainability of their investments.
5. Updating marketing documents
Marketing documents, such as the Key Information Document (KID) for products covered by Articles 6, 7, 8 and 9, will need to be updated to reflect these new categories and criteria. This is intended to improve transparency and prevent any form of greenwashing.
When will SFDR 2.0 come into force?
The revision of the SFDR 2.0 delegated acts is expected to come into force in two to three years, with a gradual transition. The first stages of implementation are expected in late 2027 or early 2028. In the meantime, it is crucial for financial players to prepare for the upcoming changes.
The Importance of Training for Market Participants
The changes brought about by SFDR 2.0 involve a significant revision of compliance strategies for asset managers. In particular, those who market funds classified under Articles 8 and 9 must be fully trained to understand the new requirements and apply them effectively. To support professionals through this regulatory transition, Leo has developed a dedicated e-learning course to help professionals in the sector remain compliant with the current SFDR 1.0 regulations, but above all to help them anticipate the new rules that will govern sustainable finance under SFDR 2.0.
Summary Table of New SFDR 2.0 Requirements
| Topics | New SFDR 2.0 requirements |
| SFDR categories | Disappearance of Articles 6/8/9 → creation of three new categories: Transition, ESG Basics, Sustainable |
| Minimum threshold | At least 70% of investments aligned with the criteria of the category |
| Exclusions | Implementation of a set of mandatory exclusions (controversial weapons, tobacco, OECD/UN violations) + additional exclusions for the Sustainable category |
| Impact investing | Introduction of an official definition |
| PAIs | Removal of PAI indicators at entity level |
| Reporting | Standardised format: maximum 2 pages, integrated into regulatory documents |
| Website | Disappearance of the dedicated SFDR product sheet |
| Scope | Advice and mandates excluded from the regulation |
| Opt-out | Possible exemption option for professional funds |
| What remains | Maintenance of obligations related to sustainability risks |
