A leaked draft of the highly-anticipated European Commission proposal for the revised SFDR 2.0 has begun circulating in the market today, Thursday 6 November 2025. Assuming that the formal publication (which is widely expected on 19 November) is aligned with this draft, then there is an earthquake on its way, for the ESG regulatory regime in Europe.
In this client news alert, we set out a summary of the key takeaways from the leaked proposal and some initial comments on why this is likely to be so significant for the asset management industry. Once the proposals are formally published, we'll share a formal briefing which outlines the proposals in full.
If you'd like the speed-read / TL;DR version, please see the five key talking points immediately below. A more detailed summary then follows.
Your five key talking points (one-minute speed read)
1) A leaked draft of SFDR 2.0 is circulating in the market.
2) If the leak is accurate, the proposals for SFDR 2.0 will represent a complete overhaul of the existing SFDR regime. SFDR 2.0 would represent revolution (not evolution) for the current rules.
3) In likely order of priority for asset management firms, the five most important changes are:
- The current article 8 / article 9 regime will be removed. There is no specific grandfathering regime for existing products, which would (we assume) need to adapt to the new regime.
- In place of the current article 8/9 regime will be three mandatory product categories, relating to (i) transition investments, (ii) integration of sustainability factors, and (iii) sustainability-related objectives. The product categories will be based around a common framework of minimum 70% alignment, mandatory exclusions, and a mandatory list of permitted investment types.
- There will however be an exemption from the mandatory product categories for AIFs which are marketed exclusively to professional investors.
- The current Principal Adverse Impact (PAI) regime will be removed, at both management entity level and product level.
- There will be new naming and marketing restrictions embodied in SFDR, relating to use of sustainability terminology.
4) The current regime around sustainability risk disclosures at both manager-level and product-level will remain in place, broadly unchanged, although portfolio managers and financial advisers will be out of scope.
5) There's no formal deadline specified for this to come into effect, but the leak suggests that implementation could be by 2027-2028.
What's the context for these proposals?
By way of background, the EU Sustainable Finance Disclosures Regulation (SFDR) is a regime which requires financial market participants in the EU to make certain mandatory disclosures around how sustainability is integrated into their investment process.
SFDR also contains two specialist regimes.
PAI: First, the PAI regime requires firms (generally on a comply-or-explain basis) to consider the adverse impact of their investment decisions on sustainability factors, and to take steps to mitigate that adverse impact. In practice, almost all asset managers which were permitted not to comply with PAI chose not to comply. For those firms which were subject to PAI as a mandatory matter, it has proved to be an enormous time and resource cost to gather extremely detailed and technical climate data.
Article 8/9: Second, SFDR requires additional disclosures for certain financial products with sustainability ambitions. The article 8 regime requires additional disclosure by products which promote environmental or social characteristics. The article 9 regime requires additional disclosure by products which make exclusively sustainable investments. The article 8 and 9 regimes have been very widely adopted across the industry, and have been de-facto turned into product labels (although they were not designed in that way). European regulators have been highly critical of the perceived "mis-use" of article 8 / 9 as labels.
Although SFDR only came into force in 2021, the European regulators have been consulting since 2023 on potential revisions to SFDR, to address in particular the issues around the PAI regime and the article 8 / 9 regime. It was anticipated that a proposal for the revisions to SFDR (known widely in the market as SFDR 2.0) would be published on 19 November 2025.
On 6 November 2025, an informal draft of the proposals for SFDR 2.0 began to circulate in the market, and generated considerable discussion. This client news alert is based on that informal draft, and assumes that the formal publication will mirror the leak.
We now summarise the key changes from the informal proposal.
Replacing the article 8/9 regime with mandatory product categories
For many asset managers, the most significant change in SFDR 2.0 is that the current article 8/9 regime will be scrapped, and replaced with three new mandatory product categories (under new article 7/8/9).
We characterise the product categories are "mandatory", because SFDR 2.0 is framed such that a firm must not claim that the product invests in the manner anticipated by the category, unless the firm complies with the mandatory conditions (in other words, it would be a breach of SFDR to make the relevant claims without being compliant with the conditions).
What does Simmons & Simmons think?
The reform of the current article 8/9 regime has been very widely trailed, and so will not be much of a surprise. However, the Commission's proposal replaces the current 8/9 status with three much narrower categories, including a mandatory 70% alignment threshold, mandatory exclusions, and a prescribed list of permitted investments. It will be (much) harder to obtain the new product categories than it is to achieve article 8 status today.
With no clear grandfathering regime for existing article 8/9 products, there will be a need to ensure compliance with the new categories. This may mean that some products which currently fall under article 8/9 will not attain a new product category, and that products which want a new category will need to impose stringent new restrictions on the investment process.
However, one apparent bright spot for the asset management industry is the proposal that AIFs marketed exclusively to professional investors (i.e. non-retail) would not be required to use the product categories as a mandatory matter.
We now summarise some further aspects of these proposals.
What are the three new categories?
The three categories are proposed as follows (although please note that the client-facing name for each category is still to be specified by technical standards):
(i) transition-related objective (new Article 7)
(ii) integration of sustainability-related factors, beyond risk management (new Article 8)
(iii) sustainability-related objectives (new Article 9).
(While two of the categories retain the previous numbering from SFDR, we don't recommend thinking of them as direct successors to the current Article 8/9).
What are the requirements for each category?
There is a similar framework for the requirements for each category.
Mandatory minimum investment commitment, which is aligned with the relevant objective for the category. In all three cases, this is proposed to be 70%.
Mandatory list of exclusions. Similarly to the ESMA Fund Name Guidelines, these exclusions refer back to exclusions for Climate Transition Benchmarks and Paris-Aligned Benchmarks.
List of permitted investment types, in which the firm may permissibly invest to give effect to the sustainability objectives.
The conditions vary between the three categories, but in each case following this broad framework.
Will there still be mandatory disclosures for each category?
Yes, SFDR 2.0 will retain the current framework of mandatory pre-contractual, website and periodic disclosures for products falling in the new article 7/8/9 regime.
However, the Commission's intent is that both the pre-contractual and periodic disclosures will be significantly shorter, with a maximum length of 2 pages. In connection with this, there will be a significant reduction in the required content.
Website disclosures will also still be required, but will simply need to post the template pre-contractual and periodic disclosures (rather than having additional website-only content, as is currently required).
There will be new regulatory technical standards, to specify additional requirements for each category and the form of the mandatory disclosures.
Are there any exemptions?
Yes. Most significantly, SFDR 2.0 proposes that alternative investment funds (AIFs) which are made available exclusively to professional investors will be exempt from the mandatory product categories. The recitals suggest that this relates to the "marketing" of AIFs exclusively to professional investors, but we expect that the specific trigger for the availability of this exemption will be of key interest to managers of alternative funds. In other words, it appears that the proposal is that non-retail alternative funds would be permitted to make the proscribed sustainability claims (e.g. this is a transition fund, this fund makes sustainable investments, etc) without needing to meet the technical criteria. It would seem to be possible for AIFs to opt-in, if they wished to do so.
This exemption is not applicable to funds made available to retail, or to any other category of financial product.
There is also a separate exemption which would remove from scope closed-ended funds which are closed to new investment before SFDR 2.0 comes into force.
Is there any grandfathering for existing article 8/9 products?
No, there does not appear to be any specific grandfathering regime. In other words, once SFDR 2.0 is in force (and at the end of any applicable transitional period), it would be necessary for financial products which currently comply with article 8/9 to be compliant with the new SFDR 2.0 regime.
What is happening to the PAI regime?
SFDR 2.0 proposes to entirely remove the current PAI regime, at both management entity-level (current Article 4 SFDR) and product-level (current Article 7 SFDR).
If this proposal comes into effect, firms would therefore no longer need to make PAI disclosures, or publish comply-or-explain statements.
What does Simmons & Simmons think?
This will likely be seen as a significant win for the asset management industry. Many of our clients see PAI reporting as a burdensome, expensive and time-consuming process, with little perceived upside for your clients or investors. The removal of the regime will be a welcome relief.
How is the scope of SFDR changing?
SFDR 2.0 proposes some important changes which will narrow the scope of SFDR, in a way which is particularly relevant for participants in the asset management industry. In particular, SFDR 2.0 will remove from scope of SFDR:
Portfolio management services (where provided by an investment firm or credit institution)
Investment advice provided by an investment adviser
Those firms and products will now be out-of-scope, and so will not have to make entity-level disclosures. In addition, portfolio management as a service will not be in scope of the SFDR 2.0 product categories, and so cannot have a new article 7/8/9 product category applied to the portfolio management service.
What does Simmons & Simmons think?
For the most part, we expect that portfolio managers would be broadly relived to be removed from scope. However, the flip side of this treatment is that it would not be possible to apply the new SFDR 2.0 product categories to a portfolio management service.
Are there any other important changes?
Yes, there are further noteworthy changes proposed, including:
Remuneration policy disclosures: the current requirement under Article 5 SFDR (to disclose how sustainability is incorporated into remuneration policies) will be removed.
Sustainable investment definition: the current Article 2(17) definition of a sustainable investment will be deleted. In effect, this is no longer needed as each product category now includes much more prescriptive requirements around permitted and excluded investments.
Taxonomy-aligned disclosures: it will no longer be necessary for SFDR financial products to make mandatory Taxonomy-alignment disclosures.
Naming and marketing restrictions: SFDR 2.0 will include new restrictions on the ability of non-categorised products to use sustainability-related terms in their name or marketing materials. It's proposed that new technical standards will be required to set out the requirements of this regime.
Use of third party data: firms will newly need to introduce formalised processes relating to the use of third party data.
Is anything staying the same?
The sustainability risks disclosure regime (under Articles 3 and 6 of SFDR) will remain effectively unchanged.
However, the removal of portfolio managers and financial advisers from the scope of SFDR (see above) will of course mean that those firms would no longer need to make these sustainability risk disclosures.
Do you need to do anything today?
Today's news relates to a leaked draft of a forthcoming consultation. While there is no immediate need to take any action today, we expect that firms will be very keen to understand the potential impact of these proposals on their business and product range. Please do reach out to any of the Simmons & Simmons team to discuss.
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