Sustainability insight | 05 Feb 2026 |

Travers Smith's Sustainability Insights: Six fixes for SFDR 2.0

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KEY INSIGHTS

Private markets overlooked: Current SFDR 2.0 proposals fail to accommodate private funds’ needs, giving rise to impractical requirements and unintended consequences that could stifle innovation.

Professional investor restrictions: An exemption for communications to professional investors would facilitate open ESG dialogue, prevent “greenhushing”, and foster diverse approaches.

Engagement is vital: Now is the time for industry feedback to fix inflexible rules, clarify fund categorisations, and accommodate private markets’ strategies.

A regular briefing for the alternative asset management industry.

At the end of last year, we expressed disappointment at the European Commission’s proposal for a revised Sustainable Finance Disclosure Regulation (SFDR 2.0). We acknowledged that there were some positives, but we argued that private markets were an afterthought in the re-design of the EU's landmark sustainable finance regulation. The text omits important detail. Some provisions would impose impractical requirements on private funds; others would lead to unintended – and undesirable – consequences.

Given the role of private markets in driving change, that's very unfortunate.

But all is not lost. The Commission's proposal still has some way to go before becoming law, and the industry has a window of opportunity to influence the outcome. Now is the time to offer practical fixes.

First, the positives: Grandfathering for fully closed funds means those raised under old rules will escape a disruptive retrofit. Transition strategies will gain formal recognition, and entity-level “principal adverse impact” reports – which were not regarded as decision-useful by most stakeholders – will be scrapped.

But the new categories – "Transition", "Sustainable", and "ESG Basics" – are not yet well-defined and leave too much to market interpretation or future rulemaking. More worryingly, products that do not fit neatly into one of the categories are allowed to say very little about their actual approach to sustainability.

    "The time to influence SFDR's final form is now. … policymakers are open to practical, constructive proposals." 

This approach may suit retail funds. However, professional investors expect an open dialogue about how sponsors will apply ESG policies. LPs run tenders, conduct due diligence, and often impose their own sustainability requirements.

These limits pose the biggest challenge for alternative asset managers, and some lawmakers have recognised the industry's concern. The obvious solution would be to exempt marketing communications directed only at professional investors from the SFDR's straitjacket. If those communications are "fair, clear, and not misleading" – the existing standard under EU law – regulators don't need to restrict them further. Otherwise, Brussels will bake greenhushing into law, stifling investor negotiation and innovation.

Second, Brussels should recognise the value of engagement in Article 8 ("ESG Basics") funds. Private funds influence companies by taking board seats, owning large stakes, and working directly with management. Strategies that use credible, active engagement to drive sustainability progress should be reflected in all three categories.

Third, the mechanics of exclusions and minimum portfolio alignment need further work. Private funds investing in illiquid assets cannot rebalance quickly. If they conduct thorough screening up front, they should not be liable for subsequent changes outside their control. The existing proposal is inflexible and therefore unworkable.

Fourth, the rules do not fully reflect a private fund’s life cycle. Recognition that there is an investment (or "ramp-up") period is helpful, but funds have both investment and divestment periods, which often overlap. Alignment should be measured across the entire fund lifespan, based on original investment cost – not fluctuating market values.

Fifth, the “ESG Basics” tag is a marketing own goal. It is too weak, too political, and poorly understood. Investors recoil at “ESG” in some markets, while it is an imprecise and often mis-used term. “Basics” does not capture the ambition that EU policymakers intend – especially since an entry-level fund will need to do more than consider sustainability risks. “Responsible” or “Stewardship” may be better terms, but should be tested with investors.

Sixth, funds-of-funds will need longer to comply, and even more flexibility in applying exclusions. Funds-of-funds will rely on the categorisation of – and reports from – underlying products. A later implementation date is needed for them. Moreover, blanket exclusions will significantly restrict their investible universe.

SFDR 2.0 will not take effect before late 2027, probably later. The time to influence its final form is now. Private markets play a crucial role in driving sustainability, and policymakers are open to practical, constructive proposals.

Read Simon Witney Profile