SFDR 2.0 Explained: The New Product Categories and What They Mean for Fund Labelling

The European Parliament's Economic and Monetary Affairs Committee was due to vote on SFDR 2.0 on 15 July 2026. It did not. A lack of consensus among political groups forced a postponement, after more than 600 amendments were tabled against the rapporteur's draft report. The vote is now expected in September, with one adviser pointing to 10 September specifically and a plenary vote the week of 14 September, though the precise date is worth confirming.

What is not contested is the architecture. The Commission, the Council and the Parliament have converged on the same basic design: the Article 6, 8 and 9 classifications disappear, replaced by three named product categories, each with a 70 per cent portfolio threshold and a mandatory exclusions list. Managers now have enough certainty to map products and identify data gaps, and not enough to make final recategorisation decisions.

Here is what is being proposed, where the institutions differ, and what both fund managers and the companies they invest in should be doing.

Where This Actually Stands

The Commission published its proposal on 20 November 2025, following a review under Article 19 of the original regulation that found the existing disclosures too long and too complex for investors to understand or compare.

The Council agreed its negotiating mandate on 24 June 2026. In Parliament, ECON holds lead responsibility, with Gerben-Jan Gerbrandy of Renew Europe appointed rapporteur on 29 January 2026 and his draft report published on 28 April, containing 51 proposed amendments. Committee members had until 6 June to table their own, and the resulting volume of technical work is what stalled the July vote.

Trilogue negotiations are expected to begin in late September or early October 2026, and if they move quickly a final text could emerge by the end of the year. Application would then follow 18 months after entry into force under the Commission proposal, or 24 months under the Council's. Estimates of when the regime actually bites range from around 2028 to as late as 2029, depending on how long trilogues run and how quickly the delegated acts follow.

Treat every specific figure below as a negotiating position rather than settled law.

The Three Categories

The proposal replaces the current classifications with three mandatory categories, each occupying a renumbered article.

Sustainable, under new Article 9. For products investing in economic activities that already meet high sustainability standards, contributing to environmental or social objectives such as climate or social goals. This is the top tier and the closest successor to today's Article 9.

Transition, under new Article 7. For products financing the shift of companies, activities or assets toward sustainability. The target holdings are not yet sustainable but are on a credible transition path. Typical strategies include referencing Climate Transition Benchmark or Paris-Aligned Benchmark pathways, investing in issuers with credible transition plans or science-based targets, and structured outcome-oriented engagement.

This category is the genuine innovation. Under the current framework, a fund holding high-emitting companies that are decarbonising credibly has nowhere comfortable to sit, because Article 9 demands sustainable investments and Article 8 says little. Transition gives that strategy a name and a standard.

ESG Basics, under new Article 8. For products integrating sustainability factors beyond pure risk management without pursuing a transition or sustainability objective. Best-in-class selection on a given ESG metric, or exclusion of the worst performers, sits here.

Note the ordering. Article 7 is Transition, Article 8 is ESG Basics and Article 9 is Sustainable, which does not run in ascending order of ambition. Expect confusion during the transition period, and expect the category names themselves to be settled in delegated legislation rather than the level one text.

The 70 Per Cent Threshold

All three categories share the same core structure, and this is the part fund managers should model first.

A minimum investment commitment of 70 per cent aligned with the category label. For a Transition product, 70 per cent of investments must meet a clear and measurable transition objective. For ESG Basics, 70 per cent must integrate sustainability factors. For Sustainable, 70 per cent must meet the relevant high standards.

A compulsory exclusions list, referring back to the exclusions applied under the Climate Transition Benchmarks and Paris-Aligned Benchmarks regulation. This is a significant tightening, because it imports a defined set of exclusions rather than leaving each manager to set its own.

A defined set of permissible investments operationalising the category objective.

One route through the Transition test is worth flagging: a product can qualify where at least 15 per cent of its investments are EU Taxonomy-aligned. For managers with Taxonomy data already assembled, that is a considerably more tractable test than demonstrating transition credibility holding by holding.

Seventy per cent is a high bar relative to current practice. A great many funds currently classified as Article 8 hold nothing like 70 per cent of assets meeting any defined sustainability standard, because Article 8 never required them to. Those funds face a choice between raising the proportion, moving down a category, or exiting the labelling regime altogether.

What Happens To Funds That Do Not Qualify

This is the consequence that drives the whole exercise.

A fund that does not fall into a category, or fails to meet its criteria, will not be permitted to use terms including sustainable, green, ESG or impact in its name or marketing. The Parliament has gone further, proposing that any fund not meeting the new criteria must carry a clear disclaimer for retail investors.

The practical effect is a genuine labelling regime rather than a disclosure regime. SFDR was designed as transparency legislation and became a de facto label by accident, with Article 8 and Article 9 used as marketing shorthand. SFDR 2.0 makes the labelling explicit and attaches enforceable criteria to it.

On naming, there is some continuity. Funds already aligned with ESMA's guidelines on fund names are expected to remain compliant, and adjustments are likely to concern reclassification rather than renaming. That is a meaningful easing for managers who did the ESMA naming work during 2025.

What Is Being Removed

Three deletions matter as much as the additions.

The definition of sustainable investment disappears. The Commission judged the term confusing, overlapping and unhelpful in excluding transition investments. The underlying concepts, contribution to environmental or social objectives, do no significant harm, and good governance, are integrated into the requirements for each category instead. Managers who built classification logic around that definition will need to rebuild it around category criteria.

Entity-level principal adverse impact reporting goes. The reporting under Articles 4 and 5 is proposed for abolition to avoid duplication with CSRD. Principal adverse impact information remains at product level, with simplified templates.

Article 6, 8 and 9 as classifications go entirely. This is not a relabelling of existing buckets, and mapping is not mechanical.

Where The Institutions Diverge

The Council broadly supports the three-category architecture and proposes targeted calibrations rather than structural change.

Two Council amendments matter most. On principal adverse impacts, for products in the Sustainable and Transition categories, PAI disclosure would become a qualifying condition, with mandatory use of at least three indicators from a list to be set by the Commission. That is a comparability fix, responding to criticism that the current framework allows too much discretion in how PAIs are reported. And on timing, the Council proposes application 24 months after entry into force rather than 18, giving managers an extra six months.

The Council also seeks greater consistency between SFDR 2.0 and existing sectoral legislation including MiFID II and PRIIPs, clarifying how the categorisation regime would sit alongside product rules, and proposing a review of whether structured products should fall within scope.

Parliament is heading somewhere stricter. The rapporteur's draft tightens the criteria applicable to the ESG Basics category, raises certain thresholds linked to the Taxonomy, and abolishes certain safe harbour mechanisms in order to apply more uniform exclusion rules across products, while supporting the Commission on abolishing entity-level reporting.

The compromise amendments dated 14 July 2026 point to one divergence that would matter enormously if it survives. New projects for the exploration, extraction, distribution or refining of coal, lignite, oil or gas would be excluded outright from Transition products. That would sharply narrow what a Transition fund can hold and cuts against the category's stated purpose of financing companies that are not yet sustainable. It is the single provision most worth watching through trilogue.

The eligibility tests, exclusions, PAI requirements and entity-level disclosures all remain genuinely open.

What Fund Managers Should Do

Map every product against the three categories now. The level one architecture is stable enough for this, and the mapping exercise is what surfaces the data gaps. Treat the outcomes as provisional.

Model the 70 per cent test honestly. For each Article 8 product, calculate what proportion of holdings would actually satisfy a defined sustainability, transition or ESG integration standard. Many managers will find the number is well below 70 per cent, and knowing that now is better than discovering it in 2028.

Test the Taxonomy route for Transition products. If 15 per cent Taxonomy alignment is achievable, it is likely the cleanest qualifying path.

Check your holdings against the benchmark exclusions. The compulsory exclusions referencing Climate Transition and Paris-Aligned Benchmarks are non-negotiable across all three categories, and screening for them is a discrete piece of work you can complete before the final text lands.

Do not rename yet. Recategorisation outcomes remain provisional until Parliament votes and trilogues conclude. Naming changes made against a proposal that shifts in trilogue are expensive to reverse.

Stress-test Transition products against a hard fossil fuel exclusion. If Parliament's proposed outright exclusion of new coal, lignite, oil and gas exploration, extraction, distribution and refining projects survives, some strategies currently planned as Transition products will not qualify. Model that scenario now rather than after trilogue.

Plan the PAI position for both outcomes. If the Council's amendment survives, Sustainable and Transition products will need at least three PAI indicators from a defined list as a qualifying condition, which is a data requirement rather than a disclosure formality.

Use 2026 for inventory and 2027 for implementation. That sequencing reflects the likely 2028 application date, and it is the pattern advisers across the market are recommending.

What Investee Companies Should Prepare

This is the part that gets least attention and affects the most companies.

If 70 per cent of a Transition fund's holdings must meet a clear and measurable transition objective, the fund needs evidence from each holding. If Sustainable products must invest in activities meeting high sustainability standards, the same applies. The data has to come from investee companies, and much of it does not currently exist in a usable form.

Four things investee companies should have ready.

A credible transition plan, with emissions reduction targets, timelines and dependencies. This is the primary evidence for inclusion in a Transition product, and vague ambition statements will not qualify.

Science-based or otherwise measurable targets. Transition strategies frequently reference science-based targets as the qualifying test, which connects directly to the SBTi Corporate Net-Zero Standard and its own tightening requirements.

EU Taxonomy alignment data. The 15 per cent Taxonomy route makes turnover, CapEx and OpEx alignment figures directly valuable to your investors, even where your own Taxonomy reporting obligation has fallen away under the narrowed CSRD scope. This is a case where voluntary reporting has a clear commercial payoff.

Principal adverse impact indicators. If the Council's amendment holds, funds will need specified PAI indicators as qualifying conditions rather than optional disclosures, and they will source them from you.

The underlying point is that SFDR 2.0 converts fund labelling from a disclosure exercise into an evidence exercise, and the evidence sits with portfolio companies. A company that cannot supply it becomes harder to hold in a categorised product, which over time affects its investor base.

The Realistic View

SFDR 2.0 fixes a real problem. A regulation designed to require disclosure became a labelling system by accident, and the resulting confusion damaged both investor understanding and the credibility of sustainable finance claims. Naming the categories, setting a common threshold and imposing shared exclusions is a coherent response.

What it also does is raise the bar considerably. Seventy per cent is a demanding threshold, the exclusions are prescribed rather than self-defined, and funds that cannot qualify lose access to the vocabulary. Expect a substantial reshuffling of the European fund landscape, with some products moving down categories and others abandoning ESG labelling entirely.

For now, the sensible posture is preparation without commitment. Map, model and gather data. Hold off on renaming, restructuring and client communications until Parliament has voted and trilogues have run their course.

Preparation Checklist

Note the timeline: Commission proposal 20 November 2025, Council mandate 24 June 2026, ECON vote postponed from 15 July and expected in September, plenary shortly after, trilogues from late September or early October.
Expect application 18 to 24 months after entry into force, with estimates for the regime actually biting ranging from 2028 to 2029.
Map every product against Sustainable under Article 9, Transition under Article 7 and ESG Basics under Article 8.
Model the 70 per cent minimum investment commitment for each product against current holdings.
Test whether Transition products can qualify through the 15 per cent EU Taxonomy alignment route.
Screen holdings against the compulsory exclusions referencing Climate Transition and Paris-Aligned Benchmarks.
Rebuild classification logic without the sustainable investment definition, which is being removed.
Plan for entity-level principal adverse impact reporting under Articles 4 and 5 to be abolished, with product-level PAI retained.
Prepare for the Council's proposal that Sustainable and Transition products disclose at least three PAI indicators as a qualifying condition.
Confirm alignment with ESMA fund naming guidelines, since compliant funds are expected to need reclassification rather than renaming.
Model Transition products against Parliament's proposed outright exclusion of new coal, lignite, oil and gas projects.
Do not rename or restructure until Parliament votes and trilogues conclude.
For investee companies, prepare a credible transition plan, measurable targets, Taxonomy alignment data and PAI indicators, since funds will require these as qualifying evidence.

Position as of late August 2026. SFDR 2.0 is a legislative proposal under negotiation. The Council agreed its mandate on 24 June 2026, the Parliament had not adopted its position at the time of writing, and trilogue negotiations had not begun. Category names, thresholds, exclusions and timing may all change, and delegated legislation will settle much of the technical detail. Confirm current status before acting and take professional advice for your circumstances.

Sources

European Commission, Regulation (EU), Council of the European Union, European Parliament Committee on Economic and Monetary Affairs, Paul Hastings, Norton Rose Fulbright, Linklaters, Travers Smith, Morrison Foerster, Herbert Smith Freehills Kramer, Latham and Watkins, Elvinger Hoss, Arendt, Agence Europe, IPE, Responsible Investor, The Corner, Fried Frank, Sustainalytics, ESG Today, Projective Group

This article is intended for general professional information and does not constitute legal, financial, or investment advice.