Interpretations Will Evolve – Here’s What’s Taking Shape So Far
On November 20, the European Commission released its long-anticipated proposal to overhaul the Sustainable Finance Disclosure Regulation (SFDR). Market participants have waited years for clarity, but the new proposal – informally referred to as SFDR 2.0 – marks the beginning of another interpretative cycle rather than a definitive end point.
While the direction of travel is clearer, key elements remain subject to negotiation, refinement, and future delegated acts, and the industry should expect further shifts well into 2026-2028. Still, the current proposal offers a meaningful signal of how EU regulators aim to simplify disclosures and improve comparability of financial products for end-investors.
Below, Malk breaks down what we know today, what may still change, and what private equity investors and their portfolio companies should begin preparing for – with the strong caveat that rules, definitions, and thresholds will continue to evolve.
1. A Clearer Categorization System – Potentially Transformational
The current SFDR framework has been criticized as a “labeling regime” and created years of ambiguity. SFDR 2.0 attempts to replace it with three simpler, more intuitive categories for financial products making ESG claims:
Transition (Article 7)
Products with a clear, measurable transition objective tied to environmental or social factors.
ESG Basics (Article 8)
Products that integrate sustainability in a meaningful way but do not have a formal transition or sustainable objective. This could include products using ESG ratings, sustainability-linked outperformance, positive track record, or integration approaches beyond pure risk considerations.
Sustainable (Article 9)
Products with a clear, measurable sustainable objective, assessed using appropriate indicators.
Key Structural Requirements Across All Categories
- Minimum threshold: At least 70% of investments must align with the category’s stated objective. For legacy Article 9 funds, this is a reduced threshold from the previous 100% requirement.
- Mandatory exclusions: At a minimum, products in any category may not invest in prohibited weapons, tobacco, companies violating UNGC or OECD Guidelines, or hard goal and lignite.
Note: Article 7 and 9 products are expected to carry expanded exclusion lists beyond this baseline set.
While the framework is more intuitive, the operational details – including what constitutes “clear and measurable” – are still being defined.
2. A Simplified Disclosure Framework (At Least on Paper)
A major driver behind SFDR 2.0 is reducing the administrative and technical burden created by the existing Regulatory Technical Standards (RTS). The proposal introduces several implications, but all remain subject to further specification.
Entity-Level PAIs Removed
Regulators propose removing entity-level Principal Adverse Impact (PAI) requirements from SFDR entirely. Instead, entity-level sustainability impacts would be captured under the Corporate Sustainability Reporting Directive (CSRD), an attempt to streamline duplicative reporting for companies in scope.
Reduced Product-Level PAIs
Under the current draft, PAI requirements would be determined by the new categorization system. Pre-contractual, periodic, and website disclosures would be condensed into short, standardized templates capped at a maximum of one to two pages each.
- Transition and Sustainable products would select from a new (still-to-be-developed) list of relevant PAIs.
- ESG Basics products would have no PAI requirement.
- Pre-contractual, periodic, and website disclosures would be capped at one to two pages each.
While this could significantly ease reporting burdens, the final list of PAIs – and how prescriptive they will be – remains to be seen. It is unclear how LPs will navigate the new PAI requirements and what expectations they may pass on to their GPs.
3. Grandfathering and Timelines: What’s Actually Changing, and When
The proposal now moves to the European Parliament and Council, meaning the text may change during negotiations.
As currently written:
- Application would begin ~18 months after entry into force, placing implementation in the late 2027 to early 2028 window.
- Closed-ended funds created and distributed before the application date are permitted a “grandfathering” exemption, allowing them to maintain their legacy Article 8/9 positioning and continue using existing disclosures
For all other funds, legacy work is expected to be reusable, but some redesign and documentation updates will almost certainly be required. Importantly, non-grandfathered funds will also need to confirm alignment with the 70% threshold and the appropriate (baseline or expanded) exclusion lists.
4. What GPs Should Do Now (With Appropriate Caution)
While the proposal is still early in the legislative process, private equity firms and credit managers can begin preparing in a few low-risk areas.
a. Begin Thinking Through Fund Categorization
Firms should start assessing:
- Whether any funds are eligible for SFDR’s 2.0’s “grandfathering” exemption
- Which funds (if any) could align with Transition, ESG Basics, or Sustainable
- Where a 70% minimum threshold could be feasible
- Where mandatory exclusions my create limitations
b. Review and Formalize Sustainability Data Processes
Any product aligned with Article 7, 8, or 9 will need documented approaches for:
- Use of external data providers
- Production of estimates
- Treatment of missing data
- Ability to describe methodologies and assumptions to investors
c. Monitor Negotiations Closely
We expect additional guidance, amendments, and delegated acts that will materially shape the final framework. Any strategic decisions should be treated as provisional until the regulation is finalized.
d. Fundraising Consideration: If You’re Launching a Fund in 2026
Managers without an Article 8/9 fund today, but plan to raise one before SFDR 2.0 applies, should consider:
- Whether to design the vehicle with a future Article 7/8/9 category in mind, particularly related to PAI collection and the new exclusion requirements
- Whether maintaining Article 8/9 positioning in the interim is beneficial and differentiates the manager in the fundraising process
- How evolving LP expectations around PAIs, exclusions, and thresholds may influence fund design and ongoing ESG commitments
5. The Outlook: Clearer, But Not Final
SFDR 2.0 is a significant evolution, but it is not yet a settled regime. Key definitions, thresholds, templates, and PAIs remain open. Implementation may shift and ESMA’s supervisory expectations will continue to influence on-the-ground interpretation.
For now, the safest path is preparation without over-commitment. Document processes, review your product set, and keep a close eye on negotiations.