EU’s SFDR 2.0 proposal introduces clear categories and stricter green claims rules

On 20 November 2025 the European Commission published a legislative proposal to overhaul Regulation (EU) 2019/2088, the Sustainable Finance Disclosure Regulation (SFDR). According to the report by Global Compliance News, the package, commonly referred to as SFDR 2.0, aims to simplify sustainability disclosures, enhance investor protection and reduce compliance burdens, and forms part of the Commission’s Omnibus I initiative. The proposal will now proceed through the ordinary legislative procedure in the European Parliament and the European Council and, if adopted, would apply 18 months after it enters into force, effectively positioning implementation in 2028.

The central structural change is a new product-categorisation regime that replaces the existing Article 8 and Article 9 labels with three categories: Transition, Sustainable and ESG Basics. The Commission’s announcements state that each category will be subject to strict eligibility criteria, including a minimum 70% investment commitment aligned with the product’s sustainability objective and mandatory exclusion of harmful industries across the entire portfolio. Transition products must support a credible pathway to measurable improvements in climate, environmental or social outcomes; Sustainable products pursue a defined sustainability objective; and ESG Basics integrate ESG considerations beyond mere risk management but fall short of the other two categories. These details are reflected both in the Commission’s press material and in legal-analysis briefings circulated after a leaked draft in November 2025.

The proposal dismantles the current SFDR regulatory technical standards (RTS) and replaces the existing template-heavy disclosure architecture with a simplified, category-aligned framework. Pre-contractual, website and periodic disclosures would remain but be significantly shortened and standardised: disclosure templates would be capped at two pages to improve comparability and readability for investors, according to Global Compliance News and the Commission’s statements. The Commission also proposes to tighten marketing rules so that only products qualifying under one of the three new categories may use sustainability-related terms in their names or promotional materials; products outside the categorisation framework could provide limited ESG information but would be barred from making sustainability claims unless they meet the new criteria.

SFDR 2.0 addresses perceived duplication with other EU corporate sustainability rules. The proposal removes the obligation on financial market participants to disclose how they consider principal adverse impacts (PAI) of investments on sustainability factors, responding to concerns about overlap with the Corporate Sustainability Reporting Directive. It would also delete the definitions of “sustainable investment” and the “do no significant harm” principle from the SFDR, simplifying legal language but signalling a shift in how sustainability outcomes are described and evidenced.

Taxonomy-related disclosures are recalibrated under the proposal. They would become optional except for transition and sustainable products with an environmental objective. To encourage use of the EU Taxonomy, the Commission proposes a safe harbour: products allocating at least 15% of assets to taxonomy-aligned activities would be deemed to meet the 70% threshold for positive contribution when seeking classification as Transition or Sustainable. Industry briefings and law‑firm summaries circulated after the Commission’s proposal highlight this as a practical compromise intended to drive early uptake of the taxonomy while avoiding rigid, across-the-board obligations.

Operationally and commercially the changes would be far‑reaching. Global Compliance News and legal advisers advise that banks, asset managers, investment advisers and other market participants should immediately map existing Article 8 and Article 9 products against the new categories to determine eligibility or whether to present ESG information outside the categorisation framework. Firms will need to bolster product governance, verify data supporting sustainability claims, and update prospectuses and PRIIPs key information documents to reflect new category rules, mandatory exclusions and shortened disclosure templates. Naming conventions, marketing strategies and client-facing materials will almost certainly require substantive revision if sustainability terms become restricted to products meeting the new thresholds.

The proposal repeals the SFDR RTS, but market participants should expect further technical standards and supervisory guidance from the European Supervisory Authorities to operationalise the new regime. According to Global Compliance News, national supervisors will also act: in Luxembourg, for example, firms should anticipate an updated CSSF SFDR FAQ and potentially fresh guidance to align domestic practice with the revised EU framework. Legal analyses published following the leak emphasise that detailed implementing measures will determine how stringent the 70% test, exclusions and safe‑harbour mechanics will be in practice.

The legislative timeline is straightforward but significant for planning. The Commission’s proposal must be agreed by the European Parliament and the Council; only after entry into force will the 18‑month transition clock start. Industry commentary in legal briefings notes that this window gives firms time to redesign products and documentation, but also warns that political negotiation could alter key provisions before final adoption. Market participants should therefore prepare for both the substance of the proposal as published and for possible modifications during the co‑legislative process.

If adopted largely as proposed, SFDR 2.0 would recast the compliance and marketing landscape for sustainable financial products in the EU, prioritising simpler disclosures, clearer product labels and stricter limits on sustainability claims, while removing certain entity-level and duplicative obligations. According to the European Commission’s communications, the aim is a more coherent, investor‑friendly disclosure architecture that reduces greenwashing risk and streamlines reporting burdens for firms, outcomes that will depend on the detail of forthcoming technical standards and the final text agreed by legislators.