Leaked SFDR 2.0 Proposal: New fund categories and reporting simplification
Today, a leaked draft of the EU Commission’s proposal for SFDR 2.0 was released into the market. It’s my opinion that these leaks are intentional and strategic to gather initial thoughts on a proposal ahead of a formal release. Well, our initial thoughts are that these are significant changes. Formal publication is expected on 19th November (earlier than the Q1 we had been anticipating), so please be aware that the points below are only provisional.
Key changes expected to SFDR framework are set out below:
Product Categories
As expected, the concepts of Article 8 and 9 as we know them will be scrapped and replaced with product categories. The product categories will be known as Articles 7, 8 and 9. It will not be possible to claim that a fund in scope for SFDR invests in line with these categories without using them formally.
These categories are:
| Category | Objective | Alignment Requirement | Mandatory Exclusions |
|---|---|---|---|
| New Article 7 |
Transition-related objective |
70% |
Climate Transition Benchmark Exclusions – i.e. controversial weapons, tobacco, human rights violations |
| New Article 8 | Integration of sustainability-related factors, beyond risk management |
70% |
|
| New Article 9 | Sustainability-related objective |
70% |
Paris Aligned Benchmark Exclusions – i.e. controversial weapons, tobacco, human rights violations AND fossil fuels, including new coal/oil/gas and new coal/lignite power generation |
Importantly, whilst some of the terminology has been reused, the criteria are such that there is no guarantee that an existing Article 8 or Article 9 fund will qualify for the new Article 8 and Article 9 respectively.
PAIs
Notably, the PAI regime is expected to be abolished entirely! This includes both management entity PAI disclosures (current Article 4 entity level disclosures) and product-level (currently Article 7 SFDR).
We generally see this as a positive as the PAIs have been tricky to apply, especially in private markets, but watch out for the mandatory exclusions in their place.
Sustainable Investments
The current (loose) definition of Sustainable Investments (Article 2(17)) which has received much criticism is being removed – deemed unnecessary in light of new product categories and prescriptive requirements.
Disclosures
There will still be mandatory pre-contractual, website and product disclosures for Article 7, 8 and 9 funds, but these are expected to be less detailed than current disclosures.
Importantly the website disclosures will be the same as the pre-contractual and periodic disclosures (rather than being a separate template).
There will be new regulatory technical standards (RTS) to follow for these disclosures.
Entity level disclosures (which we always considered to add little value) have been removed (remuneration policy disclosures under current Article 5 and PAI consideration under current Article 4).
Applicability
It appears that the new categories will be optional for AIFs that are made available exclusively to professional investors, but not for funds marketed to retail investors, or for any other category of financial product.
Closed-ended funds which are closed to new investment before SFDR 2.0 comes into force will be exempt.
Timing and Grandfathering
Official proposal is due on 19th November 2025.
Once the rules are final, it appears there will be a 12-month transition period.
There is no grandfathering – i.e. funds currently disclosing in line with Article 8 or Article 9 will need to adjust to be compliant with the new product categories to be compliant with SFDR 2.0.
What’s staying the same?
Not much! But the broad disclosures on the integration of sustainability risks are remaining as they were (Article 3 entity level and Article 6 product level).
What next?
We advise not taking any immediate action as this is simply a leaked document and could change materially or immaterially by 19th November. We will of course bring a final version note to you once released. But this is very interesting food for thought and we will be here to support you every step of the way for the transition when the time comes.
We’re here to discuss if helpful and will be in touch again later in November.
Further Reading
