With tough love, and some element of hindsight, the industry is telling The European Commission’s November 2025 SFDR overhaul proposal “I told you so”. It arrived after years of industry frustration, parliamentary pressure, political pushback across Member States, diverging supervisory interpretations, and a global pivot toward transition-aligned finance rather than static products that couldn’t demonstrate evolution.
It is seen as a positive step in some ways; Europe is demonstrating through policy that the anti-greenwashing regime must become less performative if private capital is truly expected to power climate and social transition. In essence, it is a rewind of a classic example of a ‘founder’ creating a ‘product’ that doesn’t solve a user problem, but some might argue it still remains uncompetitive, especially having been given a glimpse from the leaked documents referring to a reversal of private markets disclosure requirements.
It has historically been the case that the period of evolution between The European Commission to Parliament and through to National Competent Authority integration will not necessarily be smooth. What is critical, however, is provable intent, measurable allocation and transparent logic to enable sustainable finance to flourish, not restrict it.
Below is an insights-led roadmap on what firms can look to do next and how to use this time to look at product strategy before enforcement dates.
Understanding the new categories
The three proposed voluntary categories (Sustainable, Transition, ESG basics) reflect a noticeable shift in European thinking – from ‘disclosure approach’ to ‘labels’:
- Sustainable: a small, high-bar group of products allocating primarily to assets already aligned with sustainability outcomes.
- Transition: arguably the most politically important category, acknowledging that the real economic transformation occurs in assets that are not green yet.
- ESG basics: risk-aligned strategies integrating ESG, but without transition or sustainability ambition baked into their objective.
The shift in approach echoes what policy makers have been saying in panels for two years: Europe cannot regulate its way into sustainability by only rewarding “already green” assets. Transition finance must be a legitimate, recognisable product class.
The parallels with the UK SDR framework are at a surface level intentional, a convergence many in industry consultation responses have asked for, to cut the administrative burden on cross-border products. SDR’s three-label architecture (Focus, Improvers, Impact) is philosophically analogous to Sustainable / Transition / ESG Basics. This convergence, while not perfect, is the closest the EU and UK have been to alignment in sustainable finance when considering the respective disclosure frameworks.
Exclusions are also now part of the proposal. Supervisors want categorised funds to avoid the reputational issues seen under Article 8/9, where funds with fossil exposure, arms exposure or questionable governance records were still labelled as “sustainable”. Although the intention is to eliminate that ambiguity, the ambiguity remains as to what falls into those definitions. The outcome for this may be impactful.
Mapping products to new categories
Treat the categories as a strategic classification exercise, not regulatory labelling, and for those that have undertaken the SDR exercise for the UK, assess the alignment of the frameworks and determine where there is leverage in cross-framework application. Investors, ratings providers and regulators converge quickly on inconsistencies, so being intentional with product strategy is critical for internal direction and external communications.
Actions to take now:
- Moving away from Article 8/9, segment funds by real underlying ambition
- Re-run holdings analyses through the lens of 70% strategy alignment and exclusion logic.
- Identify strategies that would typically rely on Article 8 labelling but lack the fundamental design to see if they now qualify for any new category.
- Quantify repositioning cost: if there are portfolio or mandate amendments, what is the operational and liquidity impact?
- Challenge the commercial value of tagging every strategy: some funds perform better when decoupled from ESG branding.
The “awkward middle”: what to do with funds that don’t neatly fit a category
The biggest philosophical question raised in parliamentary discussions is this: how do you regulate products that integrate ESG in a meaningful way but are not designed as “sustainability products”? This is where Articles 6a and 13(3) might create an interpretation challenge for firms.
- Article 6a allows factual ESG statements for non-categorised funds.
- Article 13(3) prohibits ESG names or marketing claims unless the fund opts into a category.
This forces managers to make a strategic choice: elevate the fund, or intentionally de-ESG it.
It can be said that the future of ESG integration may become “quietly embedded” in mainstream funds, without public-facing ESG branding and a re-normalisation of fiduciary ESG, which could lead to:
- Fewer labelled funds
- But higher ESG integration quality across all funds
- And a clearer dichotomy between “ESG as process” and “ESG as objective”
As always, record-keeping for the decisions made at integration and keeping a robust and consistent approach will be key.
Don’t forget your audience
The political debate is often framed around regulators vs managers, but there is pressure from investor expectation. There is a clear divergence between retail, institutional and sovereign investors’ appetite for sustainable or transition-aligned products. Ensure the right people are in the room for your working groups, and while discussing regulatory change at this impact level.
Structured conversations need to keep product labelling, investor preferences, and distribution platform demands aligned. For firms active in both the UK and Europe, synchronising SFDR categorisation with SDR label usage will avoid the fragmented messaging that undermined investor trust.
Timelines
While the formal EU process will take 12–24 months, industry should not underestimate the political appetite to finalise SFDR 2.0 before the next electoral cycle. Parliamentary committees have repeatedly signalled impatience with the current framework, and several Member States have been pressing the Commission to fix Article 8/9 inflation.
Once finalised, the 18-month implementation period is standard but must not be overestimated in terms of supervisory activity. ESMA, national regulators and the Joint Committee will begin shaping guidance, Q&As and expectations ahead of the legal application. Firms have a practical window for product redesign and strategic review, which might be useful rather than waiting for final RTS, given regulatory change takes a surprisingly long time to analyse and bring into internal alignment with thinking, policies and procedures. The conceptual direction is stable, and certain product governance decisions and discussions can start now.
Stress-test exclusions against US “red state” anti-boycott laws to identify early commercial challenges
The SFDR exclusions create a direct collision with US political landscapes.
A growing number of US states treat fossil-fuel exclusions as political boycotts and have added managers with these strategies to “blacklists”. Several states have already placed major global asset managers on restricted lists, and this trend is accelerating.
This is where many firms underestimate the commercial impact: it is not simply about losing mandates; some states can block operational contracts, pension business or advisory engagements for firms deemed “ESG-aligned”.
Only two paths exist and both require intentional design:
- Architect products so EU-labeled strategies do not flow into restricted US channels, or
- Build credible financial (not political) rationales for exclusions, supported by documented risk-return evidence.
Practical Integration
A phased integration might look like:
Mapping
- Map funds to potential categories and SDR labels.
- Identify category misfits, naming risks, and data gaps.
- Review US distribution exposures.
Design (next 6–12 months)
- Determine category strategy by investor segment.
- Align UK and EU labelling decisions.
- Draft updated mandates, exclusions and stewardship frameworks.
Implementation (during the 18-month window)
- Update prospectuses and KIIDs/KIDs.
- Adjust portfolios and internal data architecture.
- Train investment, sales and product teams on the new narrative.
Elira Solutions
Elira Solutions partners with financial services businesses to streamline cross-border regulatory strategy, product governance and operational efficiency.
We can support your SFDR compliance ambitions by:
- Reviewing cross-border product governance architecture
- Operational streamlining between teams and reporting obligations
- Narrative design for investors and regulators
- Decision-tree modelling for fund classification