The European Parliament's recent draft report on the revision of the SFDR outlines the future regulatory framework for sustainable finance (SFDR 2.0). The draft proposes a strategic rebalancing of the European Commission’s initial proposal, aiming to strengthen the effectiveness of the regulatory framework while reducing the administrative burden on market participants.
To understand the scope of this intervention, it is essential to contextualize its development. In force since 2021, the SFDR imposes precise transparency obligations on asset managers and advisors regarding ESG factors, ranging from measuring the environmental and social impacts of investment decisions to producing the technical evidence required to substantiate the green credentials of financial products.
However, practical application has revealed structural limitations, notably the misuse of the original Articles 8 and 9 as commercial "labels", thereby exposing the market to greenwashing risks. To address these critical issues, the European Commission outlined the structure of SFDR 2.0 through a strategic revision proposal presented in late 2025.
The EU executive aims to implement a shift based on three core areas:
- Structural simplification: elimination of entity-level disclosure requirements and the corresponding exclusion of financial advisors from the scope of the regulation.
- Documentary efficiency: streamlining disclosure obligations relating to individual financial products.
- New classification model: phasing out the architecture centered on Articles 8 and 9. This will be replaced by a standardized categorization system reflecting actual market dynamics, built around three classes: "Sustainable", "Transition", and "ESG Basics".
Key modifications in the European Parliament draft report
- Support for categorization with stricter criteria: the Parliament approves the Commission's new category-based system but demands stricter access requirements to prevent the new designations from turning into marketing tools lacking genuine ESG substance.
- Tightening of taxonomy thresholds and removal of automatic compliance: to qualify for the sustainability, and transition-oriented categories, the minimum EU Taxonomy alignment threshold is raised from 15% (Commission's proposal) to 20%. Furthermore, the presumption of automatic compliance for funds aligned with EU climate benchmarks is removed.
- Mandatory PAIs: contrary to the initial flexibility envisaged, the Parliament requires a core set of Principal Adverse Impact (PAI) indicators to be mandatory across all categories, ensuring data standardization and comparability.
- Screening mechanisms for "ESG Basics": products based on general ESG metrics will be required to adopt a restrictive filter, strictly excluding at least the worst-performing 20% of the investable universe.
- New anti-greenwashing disclaimer: products that have not been classified under the SFDR framework must include a prominent warning stating that the financial product does not meet the standards of the EU SFDR Regulation.
Timeline
While the publication of the Draft Report marks a step forward for SFDR 2.0, the legislative process remains complex. Definitive adoption will take time, conditioned by ongoing parallel streamlining efforts and the future issuance of Level 2 technical standards. Precisely to allow for the definition of these complex standards, the European Parliament has extended the transitional period between publication in the Official Journal and the effective application of the new rules to 24 months, postponing the full operation of the reform to 2028.
Conclusions
The shift driven by the European Parliament demonstrates that the transition toward SFDR 2.0 will require asset managers to elevate the qualitative standards of portfolio data. For boards of directors and legal counsels, the immediate priority is to monitor the progress of negotiations and initiate a preliminary product mapping to prevent strategic misalignments.
van Berings offers targeted legal counsel to adapt governance models and align compliance programs with the new European Union standards, ensuring business continuity in respect of regulatory deadlines.
