The SFDR overhaul: New categories, new rules, new expectations

On November 20^th the European Commission proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR) which would introduce a new prescriptive framework for sustainable finance. The reforms move the SFDR from a disclosure regime to a product categorization system, with prescribed thresholds, exclusions, and transparency duties. For financial market participants (FMPs), the implications are significant: product strategy and governance, reporting processes, investment due diligence and data management will all require substantial redesign.

While the proposal reduces entity level reporting obligations and narrows down the scope to exclude portfolio management mandates, financial institutions will still need to consider the revised framework and determine how these shifts reshape their sustainability strategy and their product portfolios.

Expected regulatory timeline

Shift from a disclosure to a categorization regime with three new product categories

The introduction of a dedicated transition category marks a notable shift in the revised SFDR framework. For the first time, products investing in activities that are not yet green but are moving in that direction have a clearly defined place. This fills a long-standing gap in the market where transition-focused strategies often struggled to fit within the previous Article 8 and Article 9 structure.

Transition Category (Article 7)
Products that support environmental or social transition, with most investments tied to a clear transition objective and subject to strict exclusion rules and principle adverse impact disclosures.

ESG Basics Category (Article 8)
Products that integrate sustainability factors in their investment process, meeting a minimum investment threshold and standardised exclusion criteria.

Sustainable Category (Article 9)
Products that primarily invest in activities with measurable environmental or social objectives, following the most robust exclusion rules and reporting on their principal adverse impacts.

Overview of key product category criteria

Introduction of a New “Impact” Sub-Label

The proposal adds a new “impact” designation for transition and sustainable products that target a clear, measurable environmental or social outcome. Products using this label must define a pre-set impact theory and report on how their investments deliver against those objectives.

The proposal sets clearer parameters for products investing in other SFDR-categorised funds.

They can meet the 70% threshold via exposure to other categorised products (e.g., a fund of sustainable funds may count underlying holdings)

Non-categorised products that claim exposure to underlying Article 7/8/9 products must disclose how much of the product is invested in each type of underlying categorised product, how much is invested in other assets, and what objective, strategy and exclusions apply to that non-categorised portion.

While several existing reporting requirements are being removed (see further below), the core product-level disclosures remain in place.

The currently applicable Art 8 and 9 templates would be replaced by the new categorization system. The three new categories would have to disclose based on new standards that will be further defined by the Commission.

New rules draw a firm line: sustainability claims are now reserved for products that fall under the newly proposed SFDR categories.

Only products classified under Articles 7,8 or 9 may use sustainability-related language, and only when the claims are clear, fair, not misleading and consistent with the product’s stated sustainability approach. Use of the term “impact” is restricted to products that meet the definition.
The rules explicitly prohibit non-categorized products from using any sustainability-related terms in their names or marketing materials.
For non-categorized products making voluntary disclosures on the integration of sustainability factors in pre-contractual documents, it must be ensured that the information is not presented as the central element and is limited to less than 10% of the volume occupied by the presentation of the financial product’s investment strategy.
Any ESG ratings referenced in marketing must now be linked to the disclosures required under the EU ESG Rating Regulation (Regulation (EU) 2024/3005).

The proposal raises the bar on transparency, requiring financial market participants to:

Establish formal, documented agreements with any external data providers whose information is not publicly available, ensuring greater clarity on data sources and usage conditions.
Develop and maintain well-structured, consistently applied methodologies for any internal estimates, supported by comprehensive documentation to evidence their robustness.

Provide clients, upon request, with additional information on sustainability-related financial products that goes beyond the disclosures already mandated under the relevant regulatory articles.

The proposed amendments would remove several disclosure requirements including:

Entity -level PAI disclosures
Sustainability risk references in remuneration policies
Blanket obligation to report the product’s Taxonomy eligibility or alignment

Ahead of the Curve: PwC’s Approach to Navigating SFDR 2.0

The draft regulation must now move through the EU legislative process, which may lead to further changes. Once finalised, it will apply 18 months after its publication in the Official Journal. As a result, implementation of SFDR 2.0 remains some distance away; however, the breadth of the proposed changes makes early preparation essential.

The new framework does not include a grandfathering regime, meaning that existing funds will also need to comply once the rules take effect. The only exception applies to closed-ended funds that are no longer being distributed after the revised SFDR comes into force.

To start assessing readiness, firms can already consider the following questions:

How will our existing products map to the new Article 7, 8 and 9 categories, and what strategic or design changes might be required to meet the associated thresholds and exclusions?
Are our sustainability claims, marketing materials and naming conventions fully aligned with the revised restrictions?
What updates to website disclosures and internal governance will be needed to support the new, streamlined pre-contractual and periodic reporting requirements?

This analysis will help firms identify the operational, data, and governance changes required to transition smoothly into the revised SFDR framework, in preparation for further clarifications brought by the future Delegated Acts.

By partnering with PwC, financial institutions can confidently move beyond legacy SFDR approaches and adopt a future-proof compliance framework—empowering them to take proactive steps in sustainable finance while staying well-positioned to navigate evolving regulatory requirements.