Anna Maleva-Otto’s articles from Proskauer Rose LLP are most popular:
- with Finance and Tax Executives
- in United States
- with readers working within the Banking & Credit, Business & Consumer Services and Securities & Investment industries
On 20 November 2025, the European Commission officially launched their legislative proposal
(“Proposal“) for the updates to the
Sustainable Finance Disclosure Regulation
(“SFDR“). In a significant departure
from the current SFDR disclosure regime, the European Commission
proposes a categorisation regime for funds in its place.
The timing remains uncertain but we expect the package of
alters to SFDR (referred to as “SFDR 2.0”) to come into
force at the earliest at the finish of 2027 or in 2028.
We cover here the core features of the amfinishments proposed,
including how it contrasts to last week’s leaked version which
has been much reported on. Please see our note summarising the
leaked proposal here.
Entity-level disclosures
The Proposal rerelocates the entity-level disclosure obligation to
publish remuneration disclosures and, for financial market
participants with 500 employees or more (or others opting in),
disclosures on the principal adverse impacts of their investment
decisions with regards to sustainability factors. This is a relocate
that will be welcomed by a significant portion of firms in scope of
SFDR.
Product-level disclosures
Three core categories are proposed with mandatory criteria,
which the European Commission in their accompanying Questions and Answers sets out functions on
two main criteria (1): exclusions; and (2) positive contribution of
a minimum portion 70% of the portfolio’s assets must follow an
ESG strategy that matches the claims of the fund on binding
basis.
| Aim and asset allocation | Exclusions | KPIs – any or a combination | |
| Transition (Article 7) | 70% asset allocation to investments in companies and/or
projects that are not yet sustainable, but that are on a credible transition path, or investments that contribute toward improvements in e.g. climate, environment or social areas.1 |
a) companies involved in any activities related to
controversial weapons*; b) companies involved in the cultivation and production of tobacco; c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises; d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite. e) companies that develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; and f) companies that develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation. |
PLUS
|
| ESG Basics (Article 8) | 70% asset allocation to investments where there is an
integration of a variety of ESG investment approaches, but such integration does not meet the criteria of the sustainable or transition investment categories. |
a) companies involved in any activities related to
controversial weapons*; b) companies involved in the cultivation and production of tobacco; c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises; and d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite. |
|
| Sustainable (Article 9) | 70% asset allocation to investments contributing to
sustainability goals (e.g. climate, environment or social goals), such as investments in companies or projects that are already meeting high sustainability standards.2 |
a) companies involved in any activities related to
controversial weapons*; b) companies involved in the cultivation and production of tobacco; c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises; d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite; e) companies that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels; f) companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels; g) companies that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh; h) companies that develop new projects for the exploration, extraction, distribution or refining of hard coal and lignite, oil fuels or gaseous fuels; and i) companies that develop new projects for, or do not have a plan to phase-out from, the exploration, mining, extraction, distribution, refining or exploitation of hard coal or lignite for power generation. |
PLUS
|
*For the purposes of point (a) in the exclusions, controversial
weapons shall mean controversial weapons as referred to in
international treaties and conventions, United Nations principles
and, where applicable, national legislation.
The Proposal provides for two alternative routes,
besides the 70% allocation threshold, for an Article 7 product to
meet the classification test it could also be: (i) investing at
least 15% in EU Taxonomy-aligned economic activities; or (ii)
replicating or being managed in reference to an EU climate
transition benchmark or an EU Paris- aligned benchmark that
complies with the requirements laid down EU Climate Benchmarks
Delegated Regulation (EU/2020/1818).The Proposal provides for two alternative routes,
besides the 70% allocation threshold, for an Article 9 product to
meet the classification test it could also be: (i) investing at
least 15% in EU Taxonomy-aligned economic activities; or (ii)
replicating, or being managed in reference to, an EU Paris-aligned
Benchmark that complies with Commission Delegated Regulation (EU)
2020/1818.
Phase-in
The 70% minimum asset allocation may be reached by the finish of a
disclosed phase-in period, provided the timeline is disclosed in
the pre-contractual documents, which may be very applyful for private
markets managers. No maximum period is specified in the
proposal.
Environmental objectives
Further updates to note are that “environmental
objectives” are to be defined to track the Taxonomy Regulation
and cover: climate alter mitigation and climate alter adaptation,
the sustainable apply and protection of water and marine resources,
the transition to a circular economy, pollution prevention and
control, and the protection and restoration of biodiversity and
ecosystems.
Impact funds
A newly inserted Article 2 (26) establishes that
“impact” can only be included in a fund name if it is a
transition (Article 7) or sustainable (Article 9) fund, that has as
its objective the generation of a pre-defined, positive and
measurable social or environmental impact.
Funds with voluntary transparency on the integration of
sustainability factors (New Article 6a)
Funds that are not categorized as Article 7 (Transition),
Article 8 (ESG Basics) or Article 9 (Sustainable) products may
still include, in their pre-contractual disclosure, information on
whether and how the financial product considers sustainability
factors beyond the consideration of sustainability risks. However,
there are certain limitations that must be observed in relation to
sustainability-related information, including that the information
should not constitute claims within the meaning of the Article 7
(Transition), Article 8 (ESG Basics) and Article 9 (Sustainable)
products, so that investors are not misled into believing that the
fund is categorized under these Articles.
Article 6a further sets out that sustainability-related
information should not be a central element of the pre-contractual
disclosure, which is limited to less than 10% of the volume
occupied by the presentation of the financial product’s
investment strategy, as well as being neutral and secondary to the
presentation of the fund’s characteristics in terms of breadth
and positioning within the document.
There is also an obligation to provide investors with a
description of the consideration of sustainability factors in the
periodic report. The format of this reporting is not yet clear, but
there is a reference to the annual reporting obligations under the
existing Article 11 SFDR, so AIFMs would provide this reporting as
part of the Article 22 AIFMD annual report.
Sustainability risks
The familiar requirement to disclose on how sustainability risks
are integrated and their likely impact on the returns of the fund
are retained under Article 6.
Disclosure templates
The mandatory templates for the pre-contractual and periodic
disclosures are not included in this high-level regulation and will
instead follow in regulatory technical standards. However, this
legislation does set out that the pre-contractual disclosures will
be a maximum of two pages and the periodic disclosures will be a
maximum of one page. It is notable that the European Commission
sets out in the accompanying Questions and Answers that “the
revised framework foresees only limited details being left for
implementing rules.” Therefore, when this regulatory text is
agreed managers should be able to take informed decisions in
relation to current or future funds and any categorization.
No opt out – with other restrictions now applicable to
sustainability disclosures
In the leaked version of SFDR 2.0, we reported on an opt-out available for
alternative investment funds marketed exclusively to professional
investors. This has been dropped in its entirety. It remains open
to speculation as to whether that was as a result of uncertainty
surrounding any retail touchpoints in fund structures impacting the
availability of the opt-out or alternatively was a step too far in
deregulation.
Managers that decide not to classify their products under
Article 7 (Transition), Article 8 (ESG Basics) or Article 9
(Sustainable) but still wish to describe their approach to
sustainability will necessary to navigate Article 6a carefully. Article
13(3) There is a further restriction on the apply of
sustainability-related claims in fund names, which may be simple to
marketing communications and fund names. Distinguishing between
limited disclosure of integration and sustainability-related claims
may be challenging; so further clarification in implementing rules
would be assistful. However, as mentioned above, the European
Commission indicates that only limited alters to delegated acts
are expected, so this remains an area to watch.
Managers that choose not to classify their products under
Article 7 (Transition), Article 8 (ESG Basics) or Article 9
(Sustainable) but still wish to describe their approach to
sustainability will necessary to navigate Article 6a carefully, as set
out above. While Article 6a allows for limited inclusion of
sustainability-related information in “pre-contractual
disclosures”, managers must also consider the restrictions
under Article 13(3), which provides that financial market
participants may not include sustainability-related claims in the
names or “marketing communications” of financial products
referred to in Article 6a.
This creates a fine balance: although some sustainability
information may be permitted under Article 6a in pre-contractual
disclosures, any reference that could be interpreted as a
“sustainability-related claim” in marketing materials
(or, less of an issue, product names) could fall foul of Article
13(3). Distinguishing between limited disclosure of sustainability
integration under Article 6a and prohibited sustainability-related
claims und Article 13(3) may prove challenging, particularly with
the overarching aim to be clear, fair and not misleading across all
documentation. Further clarification in the implementing standards
or in European Commission guidance will be welcome on this.
Timeframe for SFDR 2.0
Timing remains uncertain but we expect SFDR 2.0 to come into
force at the earliest at the finish of 2027 or in 2028.
Next steps – for the European Commission and for asset
managers
The European Commission proposal will now be submitted to
European Parliament and Council of the European Union for their
deliberation, which may trigger updates and amfinishments. Timing
remains uncertain but we expect SFDR 2.0 to come into force at the
earliest at the finish of 2027 or in 2028.
Asset managers may want to receive ahead with the following or
alternatively wait for the final version:
- Map existing fund strategies against the new categories;
- Utilise investor relations team to establish investor
expectations on categorization; - Analyse the impact of exclusions against any Red State investor
anti-boycott legislation (which can vary) as well as against
portfolios; and - Consider fund strategies that may not fit within the new
categories while still integrating some sustainability factors, and
how to navigate the potential tension between Articles 6a and
13(3).
SFDR 2.0 Officially Launched By European
Commission
The content of this article is intfinished to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Leave a Reply