Legal briefing | 25 Sep 2026 |

Travers Smith's Sustainability Insights: SFDR 2.0 – the mist clears

What is agreed about SFDR 2.0, and where gaps remain

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            KEY INSIGHTS
        
Some clarity, at last: After nearly a year of debate, key elements of SFDR 2.0 seem to be all but agreed: a three-category product labelling regime that is unlikely to apply before early 2029. There will be further negotiations over the precise details.

New benefits, new burdens: Alternative asset managers may be heartened by the EU Parliament's support for an opt-out for some professional-only AIFs and an exemption for legacy funds. However, there are proposed new disclosure and reporting requirements for asset managers generally, as well as some new product-specific requirements, that will add cost and complexity.

Private markets not specifically addressed: By failing to adopt provisions dealing specifically with real and private assets, the EU Parliament has missed an opportunity to provide greater clarity about how private market fund managers can navigate the SFDR 2.0 framework.

A regular briefing for the alternative asset management industry.

Nearly a year ago, the European Commission published its proposal for a revamped sustainable finance disclosure framework, known as SFDR 2.0. The Council of the EU agreed its negotiating position in June 2026. Since then, progress has been slow. The European Parliament's discussions were interrupted by the summer recess but have now been completed. Earlier this month, the Parliament's Economic and Monetary Affairs Committee — ECON — finally published its own position. Assuming the Parliament endorses it next month, formal negotiations between the three institutions can then begin. On the current timetable, SFDR 2.0 is unlikely to apply before H1 2029 at the earliest.

Though recent experience has taught us that no legislation is final until the moment it is actually published, core elements of SFDR appear to be agreed. All three institutions agree on a product categorisation regime built around three distinct categories: "Transition", "ESG Basics" and "Sustainable". Each carries detailed rules on eligible investments and exclusions, and products must allocate at least 70% of their portfolio accordingly. ECON's lead MEP heralded the committee's position as a "broad compromise" that would give investors certainty their money was "actually contributing to a greener economy". But does it really improve on what the Commission and the Council proposed? The answer is mixed, and in some respects, industry might feel that the Parliament has moved in the wrong direction.

Starting with the positives, ECON has proposed an opt-out from the product categorisation rules for alternative investment funds (AIFs), marketed exclusively to institutional investors. The opt-out is slightly narrower than the one proposed by the Council, but it is welcome. Whether the market will accept uncategorised funds is an altogether different question. Looking at the not-insignificant proportion of European investors who require at least some minimum environmental or social commitments before they will invest, the answer might well be "no". Funds outside the specified categories will face challenges in how little they can disclose about sustainability, and potentially an array of different requests from investors if they operate outside SFDR's substantive confines.

ECON has also proposed exempting closed-ended funds that are no longer being marketed when SFDR 2.0 takes effect. This should spare managers the burden of updating documents for legacy funds, though ECON has clarified that these funds will need to continue to comply with their existing SFDR 1.0 contractual commitments. On eligible investments, ECON has expanded the range of instruments that can qualify for the "ESG Basics" category, including certain use-of-proceeds bonds and general-purpose debt issued by governments and supranational bodies.

These are sensible improvements. But they are accompanied by new burdens elsewhere in the framework. In particular, ECON has proposed requiring fund managers (whether or not they manage SFDR 2.0 sustainability-related funds) to disclose annually what proportion of their assets under management, and what proportion of their products, fall into each SFDR 2.0 category. It has also proposed new "comply or explain" requirements obliging categorised funds to describe their sustainability engagement strategy — or explain clearly why they do not have one. (Managers of SFDR 1.0 categorised funds might well already be reporting on engagement.)

"Strategies that rely on proactive engagement — acquiring a company, improving its practices, and exiting — may still find themselves locked out of SFDR 2.0's product categories, unless they can back it up with a transition plan of some kind. That is a serious flaw."

ECON has also declined to revisit the names of the three product categories, despite industry concern that "ESG Basics" is both politically loaded and satisfactory to neither sustainability proponents nor opponents. There is a small concession: ECON has empowered the Commission to review the framework within three years of its entry into force, including the category names, leaving the door, at least, ajar.

ECON wants greater transparency for funds making sustainability claims, underlining that SFDR remains an anti-greenwashing measure at its core. "ESG Basics" funds would need to report on their exposure to companies active in fossil fuels. "Sustainable" funds would need to report on greenhouse gas emissions, exposure to biodiversity-sensitive areas, and exposure to companies that lack processes to comply with internationally recognised human rights and corporate responsibility standards. Given that product level reporting of these sorts of principal adverse impacts (or "PAIs") under SFDR 1.0 was previously optional (and not an option widely taken up), industry might have hoped that the Commission's position (discretionary PAI reporting) would prevail. The Parliament's position would at least remove some of the residual risk inherent in the Commission's original proposal that the level 2 measures could result in an even more burdensome PAI reporting regime.

Perhaps the most significant missed opportunity in ECON's text concerns private markets. We have argued before that SFDR 2.0 as proposed by the Commission risks marginalising private funds by failing to recognise the role of active ownership in driving sustainability outcomes. The Council at least tried to address this, albeit imperfectly. It proposed specific provisions covering real and private assets in the eligible investment definitions for all three product categories (though whether that added real clarity can be debated). ECON has not followed suit. Strategies that rely on proactive engagement — acquiring a company, improving its practices, and exiting — may be left wondering how they fit into SFDR 2.0's product categories, unless they can back it up with a transition plan of some kind. That remains a serious flaw. Industry participants will need to press their case again when the secondary measures are published.

Further compromises before the text is final could result in some more private-markets-friendly provisions, potentially improving upon rules proposed by the Council, being inserted into the final legislation. Indeed, whether any of ECON's proposals survive the tribulations of the trilogue process remains to be seen. One thing is clear: for better or worse, industry participants now have a much better understanding of the likely future shape of SFDR 2.0.

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