EU SFDR 2.0 – Parliament draft published

The SFDR has been in force since 2021. It contains transparency rules under which financial market participants and financial advisers are required to make disclosures in relation to certain sustainability factors – such as the impact of investment decisions on sustainability and, where a financial product promotes characteristics of sustainability, prescribed information supporting this characterisation of the product.

These requirements have had a significant impact on financial market participants (“FMPs”) and financial advisers and have been subject to criticism due to the complexity of applying the principles and the use of the disclosure rules as a de facto labelling regime.

In the last couple of years, the European Commission has undertaken a scheduled review of the SFDR, which highlighted a number of areas for improvement which had been identified by the market. In November 2025, the Commission published a proposal to amend the SFDR, including the proposed text for the amended version of the SFDR, which is commonly known as SFDR 2.0. In summary, the European Commission intends to: (i) remove entity-level disclosure obligations; (ii) take financial advisers out of scope; (iii) significantly reduce the product-level disclosure obligations; and (iv) implement a new SFDR categorisation system, which would be more closely aligned with existing market practice and the existing legislative framework. A more detailed summary of the proposal can be found here.

The proposal is now going through the legislative process. On 4 May 2026, the European Parliament published a draft report on SFDR 2.0 (the “Report”), which includes further suggested amendments to the text.

The key amendments proposed in the Report are:

• Packaged investment products: Packaged retail investment products, including structured products and structured deposits (excluding investment funds and derivatives), are proposed to be in scope for SFDR 2.0. (Noting that investment funds, such as AIFs and UCITS, were already within the scope of the SFDR.)
• Mandatory principal adverse impact indicators: The Commission’s proposal for SFDR 2.0 required FMPs to identify and disclose principal adverse impacts (“PAIs”) of their investments on sustainability factors but it did not prescribe the sustainability-related indicators which had to be used. The Parliament proposal requires a mandatory set of PAI indicators to be set out in the delegated act – although the explanatory statement in the Report says there will only be a limited set of such indicators. The Report also proposes that other PAI indicators material for the investment should disclosed. FMPs may also disclose other PAI indicators on a voluntary basis.
• Required disclaimers for non-categorised products: Products that have not been categorised under the SFDR should still be able to disclose limited information on the integration of sustainability factors, but they would also need to include a prominent disclaimer that the financial product does not meet the EU’s SFDR standards.
• Disclosure of strategy: The proposed changes would require FMPs offering SFDR-categorised products to disclose “a description of the sustainability-related engagement strategy pursued by the [FMP], including how that strategy has been implemented in alignment with the sustainability-related objectives of the financial product, or a clear and reasoned explanation of why it does not pursue such a strategy”.
• Thresholds and safe harbours: The Report proposes a number of changes that are intended to promote effectiveness of sustainable investments. In particular:
  • In determining whether a product comes within the “ESG basics” category, one of the criteria is that the investments outperform the average investment universe, reference benchmark, or average rating. The Report adds an additional requirement that this calculation shall be made after eliminating at least 20% of the lowest values for the chosen indicators or ratings.
  • In the “transition” and “sustainable” categories, the Commission had proposed that there be safe harbours for EU climate transition benchmarks or EU Paris-aligned benchmarks. The Report proposes removing these benchmarks as safe harbours – although alignment with those benchmarks will still be a relevant factor.
  • To come within the “transition” or “sustainable” categories, a product will now need to be 20% or more invested in taxonomy-aligned economic activities instead of the 15% figure originally suggested by the Commission.

Timing

This latest publication is the next step in the legislative process, but that process is not yet complete. The agreement of the text may yet take some time especially given the omnibus simplification work which is happening in parallel with the SFDR review. It is also be necessary to produce Level 2 text (the delegated regulation that will replace the regulatory technical standards under the current version of the SFDR) and the Parliament has extended the period from publication in the Official Journal to applicability of SFDR 2.0 to 24 months to allow for this work to be completed. Therefore SFDR 2.0 is not expected to come into effect until 2028.

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This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored byDominic Hill, Emily Julier, and Rita Hunter.