On November 6, the financial markets took note of a leaked draft proposal from the Sustainable Finance Disclosure Regulation (SFDR) , dubbed SFDR 2.0, signalling what looks to be a sweeping overhaul of the EU’s sustainable-finance disclosure regime. 

For UK businesses, especially those with EU‐facing funds or sustainability-linked products, this is highly relevant. While the UK already has its own regime of UK Sustainability Disclosure Requirements (UK SDR), the proposed EU shifts could cause alignment pressures, cross-border complexities and fresh compliance demands.

What exactly is SFDR 2.0 proposing?

Here are the key features of the leaked proposal:

• New product categories: The current product labels are to be abolished. In their place, three new categories will be introduced – transition, other ESG and sustainable  A fourth “mixed” category, may also appear, allowing multi-label products. 
• Minimum portfolio alignment requirement: Each category will come with its own threshold, for example, at least 70% of the portfolio must align with the category’s criteria. 
• Abolition of the PAI regime: The “Principal Adverse Impacts” disclosures (entity level and product level) may be removed altogether, which is an enormous shift. 
• Restrictions on naming and marketing: Products not qualifying under a label will be limited in the sustainability-related claims they can make and marketing rules will be tightened.
• Recognition of impact investing: For the first time, “impact investing” is explicitly recognised as an add-on for certain categories, such as Transition or Sustainable.
• Simplifications and exemptions: Some services (for example portfolio management or investment advice) may be removed from scope and some alternative investment funds (AIFs) may opt out if they are only made available to professional investors. 
• Disclosures refined: Taxonomy-alignment disclosures, and the separate product website disclosure regime may be abolished or simplified, pre-contractual and periodic disclosures remain but are to be streamlined.
• Timing: Formal publication is expected around November 19, 2025 with the regime likely coming into force in late 2027 or early 2028.

Why UK businesses should care

Even though SFDR is an EU regime, UK businesses cannot afford to ignore it, especially if they operate in the EU, market funds into the EU, or have UK products linked to EU operations. Here’s why:

1. Cross-border spill-over
   Many UK asset managers already operate under the UK SDR regime (which mirrors some of SFDR’s aims). As the EU shifts its regime, alignment pressures will increase, inconsistent categories or thresholds may complicate marketing, product design, and disclosures.

2. Product design and labelling risk
   If UK firms offer funds marketed into the EU (or packaged for EU investors), they may need to meet the new EU labels (Transition, Other ESG, Sustainable) or else face limitations in what claims they can make. A UK product that doesn’t align may lose access or competitive parity.

3. Disclosure burden and cost
   Although SFDR 2.0 proposes simplified disclosures, the transition to new categories, new baseline thresholds and new exclusions means operational change. UK firms serving the EU market must anticipate the cost of adjusting systems, taxonomy mappings and reporting processes.

4. Governance and risk management
   With naming/marketing restrictions tightening, UK firms must be ready to substantiate sustainability claims more rigorously. The UK’s anti-greenwashing rule under the UK SDR already demands “fair, clear and not misleading” statements but the EU’s regime now appears headed for even tougher gate-keeping.

5. Strategic alignment
   Even if a UK firm focuses purely on the UK market, global investors and fund distributors are increasingly expecting alignment to EU standards (whether for comparability or risk management). Early preparation can deliver a competitive edge.

What steps should UK-based firms take now?

Although full action isn’t immediately required as transition is likely to 2027-28, proactive UK businesses should start thinking now. Here are recommended steps:

• Map out exposure: Review which funds/products are marketed into the EU and which rely on EU investor flows. Determine which current SFDR categories they use and assess whether they might meet the new categories under SFDR 2.0.

• Engage with UK SDR alignment: Ensure that UK fund labelling and disclosure practices (under UK SDR) remain robust, and map how they may overlap with or diverge from the incoming EU regime. Firms already meeting UK thresholds may be ahead of the curve.

• Review naming, marketing and claims: Re-test all sustainability-related marketing claims, product names and communications to ensure they would comply with stricter labelling and naming rules. Strengthen substantiation processes.

• Assess data and systems readiness: The 70% portfolio alignment threshold (or similar) suggests more granular data tracking on investments, sustainability criteria, exclusions and permitted investment types. Evaluate whether your investment monitoring and disclosure systems can handle that.

• Governance check-up: Ensure responsibility and oversight for sustainability labels, product eligibility and marketing claims are clear. Consider impact-investing options (if relevant) and how they might be captured.

• Plan for transition: Build a timeline, including when EU updates are formally published, when Level 2 rules issued, and when your products may need to change. Consider whether products will need refor­mulation or whether opting out is possible (if eligible).

SFDR 2.0 signals a turning point in sustainable finance regulation, moving from mere disclosure regimes to labelled, outcome-oriented product frameworks. Even if your primary focus is the UK, the cross-border ripple effects and investor expectations mean that preparation today can protect your business and give you a competitive advantage tomorrow.

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