SFDR 2.0: A New ESG Turning Point for Private Equity

Entered into force in March 2021, the Sustainable Finance Disclosure Regulation (SFDR, EU 2019/2028) has profoundly structured ESG practices among financial market participants over recent years, by strengthening transparency requirements and placing sustainability at the core of investment processes. While it has driven a notable increase in ESG maturity—particularly in Private Equity—its implementation has also highlighted major shortcomings: operational complexity, ambiguous definitions, challenges in accessing reliable ESG data at portfolio company level, and the de facto use of Articles 8 and 9 as sustainability labels. 

In response to these issues, market participants have expressed the need for a clearer and more coherent framework, notably through the two public consultations launched in 2023. It was following this process that the European Commission issued a proposal to revise the SFDR on November 20, 2025—referred to as “SFDR 2.0”.

SFDR 2.0: What Are the Key Changes?

The European Commission’s legislative proposal marks a profound structural shift: a move from a regime primarily focused on disclosure obligations toward a product categorisation regime, backed by harmonised minimum criteria.

Articles 6, 8 and 9, as applied to date, have been widely used by the market as sustainability labels, despite the absence of clearly defined regulatory thresholds or common standards. This drift has contributed to heterogeneous market practices and reduced clarity for investors.

Consequently, the European Commission proposes replacing the existing framework with a more explicit system, better aligned with other pillars of European sustainable finance regulation (CSRD, EU Taxonomy, etc.) and designed to reduce the administrative burden on financial market participants.

At the core of SFDR 2.0 is the introduction of three categories of “sustainability‑related” financial products, defined according to the nature of their objectives, the investment strategies implemented, and a set of common minimum requirements: 

• Transition (Art.7) : products aimed at supporting the environmental and/or social transition of companies or assets that are not yet sustainable, subject to clear, measurable objectives monitored over time;
   
• ESG Basics (Art.8) : products that integrate ESG factors in a structured manner within their investment strategy, without pursuing an explicit transition or sustainability objective;
   
• Sustainability (Art.9) : products pursuing a clearly defined environmental and/or social sustainability objective, measured using appropriate indicators.
   

For each category, at least 70% of investments must qualify as eligible investments as defined by regulation, and a common set of mandatory exclusions will apply across all categories (based on the climate benchmarks set out in the Benchmark Regulation, namely the CTB and PAB).

This development represents a major shift for Private Equity funds, which have historically positioned themselves under Articles 8 or 9 without always benefiting from a homogeneous quantitative alignment framework.

With a view to simplification, SFDR 2.0 proposes partial relief from certain disclosure obligations under the initial framework:

• Removal of entity‑level disclosure requirements (Principal Adverse Impacts, emuneration policy, etc.), deemed costly, complex and weakly comparable;
   
• Deletion of the regulatory definition of “sustainable investment”;
   
• Simplification of pre‑contractual and periodic disclosure templates, which will be limited to two pages.
   

These elements do not disappear entirely from the regulatory landscape: they are implicitly embedded in the eligibility criteria of the new categories, through mandatory exclusions, alignment requirements and, where applicable, obligations arising from the EU Taxonomy for environmentally‑focused products.

This refocusing aims to curb the divergent interpretations observed under SFDR 1.0, whose implementation varied widely across managers and asset classes.

SFDR 2.0 is currently at the legislative proposal stage. 
It must still be reviewed by the European Parliament and the Council, 
with an indicative timeline pointing to potential application around the first half of 2028, 
following completion of the European legislative process.

Despite this distant effective date, the proposed direction already sends a strong strategic signal to Private Equity players, who are encouraged to anticipate the operational and contractual impacts of the new framework.
 

SFDR 2.0 & Private Equity: Key Areas of Attention

The implementation of SFDR 2.0 relies on an increased requirement for reliable, traceable and auditable data at portfolio company level.

For Private Equity firms, this requirement faces several structural constraints: heterogeneous ESG maturity across portfolio companies, the current lack of widely adopted and harmonised ESG frameworks across financial players, and reliance on self‑reported data from portfolio companies, in the absence of fully reliable alternatives.

The removal of entity‑level PAI disclosures does not eliminate the need for robust ESG data. On the contrary, demonstrating compliance with the 70% alignment threshold will require enhanced capabilities in collecting and controlling non‑financial data at asset level, implying a strong structuring of ESG data collection processes within management companies.

In this new context, pre‑investment ESG due diligence becomes a core lever of SFDR 2.0 compliance. Managers will need to demonstrate, from the outset of the investment process, the potential contribution of an asset to the fund’s stated transition or sustainability objective. This requirement is likely to translate into reinforced ESG clauses in legal documentation: ESG covenants, reporting commitments, measurable improvement plans and remediation mechanisms in the event of underperformance.

Finally, SFDR 2.0 indirectly raises expectations regarding ongoing ESG monitoring. Even if standardised reporting obligations are streamlined, investor expectations are likely to remain high, while regulatory scrutiny—particularly with respect to fund naming—should intensify. Private Equity funds will therefore have to strike a balance between regulatory simplification and increasing pressure from LPs, who may demand detailed ESG reporting “upon request”, as explicitly provided for in the SFDR 2.0 proposal.

SFDR 2.0 does not represent a rollback of ESG ambition, but rather a strategic reconfiguration of the regulatory framework, placing greater emphasis on the credibility of stated strategies rather than on the accumulation of indicators. For Private Equity, this evolution implies a clear repositioning: less declarative, more strategic coherence, stronger investment discipline and integrated ESG steering.

How to Adapt and Anticipate These Changes

As outlined above, SFDR 2.0 should not be approached as a simple reporting evolution, but as a fundamental strategic shift for Private Equity funds. By replacing a predominantly declarative logic with a categorisation‑based regime, the regulator requires greater consistency between the fund’s investment strategy, the entity’s and fund’s marketing narrative, and operational practices. This evolution calls for both anticipation capacity and a renewed focus on ESG as a core component of the investment model.

One of the first challenges for Private Equity players will be to reassess the SFDR classification of both existing and future funds. 
SFDR 2.0 significantly limits opportunistic positioning: only funds meeting precise criteria—particularly the 70% investment alignment threshold, mandatory exclusions and measurable objectives—will be able to claim a “transition” or “sustainability” category.

From the fund structuring phase onward, managers will need to decide between voluntarily opting into an SFDR 2.0 category—implying a high level of requirements but offering greater clarity for investors—or remaining uncategorised, which will entail significant restrictions on ESG‑related communications. This decision is all the more strategic given that many LPs continue to use SFDR classification as an allocation criterion, regardless of its voluntary legal nature. These choices will directly impact fund marketing and regulatory documentation.

Moreover, SFDR 2.0 introduces tighter controls on ESG communications, particularly for uncategorised products, which will only be permitted to reference their ESG approach in a limited and strictly regulated manner. For categorised funds, consistency between investment strategy, pre‑contractual documentation and periodic reporting becomes central. In Private Equity, this implies a thorough overhaul of investment memoranda and marketing materials, to remove any ambiguous reference to sustainability or impact that is not legally substantiated under the regulatory text. Documentation thus becomes a core tool for demonstrating ESG credibility, rather than a mere disclosure exercise.

At the same time, GP‑LP relationships are also set to evolve. The removal of entity‑level PAI disclosure obligations does not signal a reduction in investor expectations. On the contrary, the option for investors to request additional ESG information “on demand” may increase operational complexity for management companies. In this context, it is essential to structure dialogue with LPs upstream by defining a common set of ESG indicators aligned with the fund’s strategy and regulatory framework, formalising expectations through side letters, and strengthening ESG governance mechanisms at fund level. Such anticipation enables better control over information requests and secures investor relationships in a less prescriptive but more substantively demanding regulatory environment.

SFDR 2.0 also indirectly strengthens the role of internal controls and ESG monitoring at portfolio company level. Demonstrating alignment between investments and stated objectives requires full traceability of investment decisions and regular monitoring of ESG performance at asset level. For management companies, this entails the formal integration of ESG criteria into investment processes, the implementation of improvement plans at portfolio company level, and enhanced support for management teams—particularly with respect to ESG data structuring and the gradual strengthening of internal systems. ESG thus becomes an operational value‑creation lever, well beyond regulatory compliance.

More broadly, SFDR 2.0 invites Private Equity players to move beyond a historically “defensive” ESG approach focused on compliance and reporting. By removing certain formal obligations, the regulator places responsibility for ESG credibility squarely on managers themselves. In this new framework, ESG can no longer be a mere fund attribute: it must be fully embedded in the investment thesis, target selection and holding or exit decisions.

This evolution reinforces an already emerging trend: ESG as a driver of financial performance and long‑term resilience. Funds positioned on transition or sustainability will need to demonstrate their ability to identify credible transformation pathways for companies, manage material ESG indicators linked to business strategy, and showcase progress to investors and buyers at exit.
 

SFDR 2.0 marks a structuring evolution of the European sustainable finance framework. 
By drawing lessons from the shortcomings of the initial regime, the European Commission refocuses regulation on its core objective: enhancing the comparability, reliability and credibility of 
ESG information.


For Private Equity players, this reform represents above all an opportunity for strategic clarification. 
The shift to a categorisation regime demands explicit choices and strengthens the requirement for consistency between investment strategy, ESG practices and investor communications. ESG is no longer a compliance exercise, but a structuring lever for investment governance and long‑term 
value creation.

In this context, RSM recommends that Private Equity actors begin anticipating the impacts of SFDR 2.0 now, secure their positioning and ESG data‑collection processes, and fully integrate ESG considerations at every stage of the investment cycle. Management companies capable of structuring a robust, credible ESG approach aligned with their strategy will undoubtedly be best positioned to meet investor expectations and sustainably support the transformation of their portfolio companies.