On the 20th November, The European Commission proposed a set of amendments to the Sustainable Finance Disclosure Regulation (SFDR), which is the EU's transparency framework for financial products integrating environmental or social aims.

The changes come after a round of stakeholder consultations which called for more clarity on the regulations, many felt the disclosures were too long and complex. Now SFDR 2.0 has simpler rules, which are more efficient and better aligned with market realities. 

It is expected that the earliest date the new changes would come into effect is early to mid 2028. Here we break down the key shifts for you.

1. New product categorisation regime

The main change in the proposal is the shift from a disclosure regime to a new product categorisation regime operating around three categories of product: ‘Transition’, ‘ESG Basics’ and ‘Sustainable’. The below table gives you a summary.

There are also categories for cross-category financial products and those that focus on impact.

With these categories, SFDR 2.0 sets out criteria for the products to qualify for each category based on minimum investment thresholds. For example, ‘Transition’ products must have 70% of this threshold linked to the proportion of investments making a “clear and measurable transition objective related to sustainability factors, including environmental or social transition objectives.” Click here for a full breakdown of the criteria for each product under point 14.

Within this criteria, the Articles are also new: the ‘Transition’ product criteria becomes the new Article 7 , ‘ESG basics’ are the new Article 8, and ‘Sustainable’ products are under the new Article 9. It’s also here that the idea of Principle Adverse Impacts (any impact of investment decisions or advice that causes a negative effect on sustainability factors) is retained, with asset managers holding products that fall under the ‘Sustainable’ and ‘Transition’ categories having to identify and exclude PAIs, as well as explaining any actions taken to address these.

2. Removal of entity-level PAI reporting

Under the SFDR 2.0 proposal, the European Commission has removed aspects of the entity-level disclosure requirements.

Asset managers are no longer required to publish entity-level PAI statements, however product-level PAI disclosures remain as mentioned above.

As well as this, the proposal removes entity-level remuneration policy disclosures; there is now no requirement for firms to publicly disclose how their remuneration policies integrate sustainability risks.

3. More streamlined mandatory disclosures

The proposal keeps the disclosure regime laid under SFDR 1.0, with asset managers being required to prepare disclosures at the product-level for funds that fall within the new Articles 7, 8 and 9 (as above).

As well as this, the new Articles 7 and 9 include additional disclosures for ‘Impact’ financial products. For example, disclosing the intended impact of specific environmental or social objectives, and what provisions are in place to measure, manage and report on the objectives.

4. Portfolio management and financial advisers are now out of scope

SFDR 2.0 removes portfolio management services (as provided by an investment firm or credit institution) from the definition of a financial product. It also removes investment advice provided by an investment adviser.

What does this mean for nature reporting in general?

If you have to report under SFDR, the main change is that this is now at the product level, however it will be worth tracking impacts and dependencies on nature at the entity level too. Most other reporting frameworks work at the entity level, for example the TNFD. And with the ISSB setting the global baseline for nature reporting based on the TNFD next year - it’s worth not switching all your compliance to the product level just yet!

If you’d like to discuss what these changes may mean for your organisation or explore the practical steps others are taking, our team is always happy to share insights: https://www.naturealpha.ai