Final position set for SFDR 2.0

The European Parliament has finalized its negotiating stance on SFDR 2.0, setting the stage for trilogue talks with the Council and the European Commission. This step clarifies the general direction of the sustainability regulation, even though some details remain unresolved.

SFDR 2.0 shifts toward structural changes

SFDR 2.0 is evolving into a broader structural reform rather than a minor update. The framework is moving away from the classification of markets under Articles 8 and 9 toward a more defined system of product categories. New categories such as "Transition," "ESG Basics," and "Sustainable" are expected, along with a group of non-categorized products requiring specific warnings.

Obligations shift from entity to product level

Some obligations at the entity level, such as reporting on major negative impacts and remuneration policies, may be reduced or eliminated. However, at the product level, the requirements will be stricter, with a focus on supporting sustainability claims, using sustainability-related terms in product names, and avoiding misleading marketing. Each product category would also be required to publish its major negative impacts, with added protections against misleading claims.

Redefined "sustainable investment"

The current definition of "sustainable investment" under SFDR will be removed, which will significantly affect how products are designed and how sustainability features are communicated to investors.

Implementation challenges persist

Despite the final framework not being fully set, discussions are moving toward a 70% investment threshold for products meeting their category's goals. However, the exact method for calculating and applying this threshold is still unclear. Minimum alignment thresholds with the European Taxonomy are also being considered, with proposed levels of 15% for "Transition" products and 15% or 20% for "Sustainable" products.

Exclusions remain a key focus

Exclusions continue to be a central aspect of the framework, especially through the Climate Transition Benchmark (CTB) and the Paris-aligned Benchmark (PAB). "ESG Basics" products would generally be subject to CTB exclusions, while "Sustainable" products would be subject to PAB exclusions. The debate centers on the "Transition" category, where fossil fuel exposure might be limited and require strict conditions, such as a minimum level of investment aligned with the Taxonomy and a measurable decarbonization strategy.

Sovereign debt remains unclear

Sovereign debt remains a topic of uncertainty, as sovereign bonds may be excluded from the "Sustainable" category unless they fund specific projects. They might fall into other categories, but their treatment depends on the decisions of relevant authorities.

Market remains in观望 mode

The framework is becoming clearer, especially as the Parliament's proposal nears the Council's position. However, significant gray areas remain. The market is waiting to see how exclusions, the calibration of the Taxonomy, the treatment of sovereign debt, and the eligibility for the "Transition" category will be resolved.

Political agreement target set

The co-legislators aim to reach a political agreement by the end of 2026. Assuming an 18 to 24-month implementation period, the new rules could take effect by the end of 2028 or early 2029.

Investors advised to focus on product design

For investors, the message remains consistent: focus on the robustness of product design, thorough documentation of methodologies, and transparency in published information. While the framework is still subject to change, its direction is becoming clearer, emphasizing tangible elements to support sustainability claims over conventional labels.

ESMA updates its regulatory focus

ESMA is reviewing its guidelines on the use of ESG and sustainability-related terms in fund names, with a decision expected by the fourth quarter of 2027. It will also collaborate with European authorities in the pension and banking sectors on consumer tests, technical opinions, and updates to existing guidelines.

ESMA plans further regulatory actions

ESMA plans to publish observations on ESG data, transition financing, and green obligations in the second half of 2027. It will also launch a consultation on new rules for labeling corporate sustainability disclosures. Before the end of 2026, it will provide the European Commission with a technical opinion on simplifying information under the European Taxonomy.