Whilst there are already some criteria supporting each category contained in the proposal, the prescriptive rules around eligibility of investments and form and content of disclosures will follow in the Delegated Act. What is certain is that a greater level of due diligence and evidence is envisaged around investment selection and eligibility. Inclusion of a particular stock in the portfolio will need to be linked closely to principal adverse impact indicators (“PAIs”), and the portfolio’s sustainability performance monitored by reference to them, meaning greater integration into front office and portfolio compliance systems than perhaps we had under SFDR 1.0.

The list of PAIs itself will be tweaked to align more closely with the Corporate Sustainability Reporting Directive, but that will not solve the problem of how to obtain the information for non-EU stocks in the investment universe. With that said, I can’t see a significant change in relation to the major indicators, such as Greenhouse Gas Emissions, but I do think that the list will be come more focused and some of the more esoteric statistics will be removed which will be a positive development. I was also heartened to see in the revised level 1 greater reference to the United Nations Global Compact screen alongside the OECD Guidelines for Multinational Enterprises as an indicator of basic governance and corporate behaviour.

Data challenges

As alluded to above, greater integration of data into compliance monitoring will be required under SFDR 2.0. Regulators will expect managers to have rigorous processes in place to ensure that categorised products adhere to the 70% threshold for eligible investments. Although a breach will be regarded as a passive breach, frequent reporting and extended remediation are unlikely to be viewed positively.

Sustainability-related funds will need to ensure that the basic screens for Climate Transition Benchmarks and Paris-Aligned Benchmarks (controversial weapons, tobacco, UNGC and hard coal/lignite) are effective; in my opinion relying on a single data provider without some form of periodic review/oversight will not be enough.

Under the ESG Basics category (new Article 8), funds may rely on an ESG rating for a stock provided by an authorised ESG Ratings provider. The EU ESG Ratings Regulation becomes effective on 2 July 2026, so if you are using ESG ratings in existing portfolio construction, it would be worth understanding whether or not your provider is seeking authorisation.

Under the original SFDR, there were some differences in calculation methodologies for some widely-used PAIs between the regulation and the statistic used by other bodies or provided by data companies. It remains to be seen whether these will persist in the new Delegated Act, but it will be important to identify the differences for the purposes of the disclosures around data and estimates.

Given the disclosures required around data and estimates envisaged under the amended regulation, it would be good practice to formalise your policies and procedures to ensure that they are applied consistently, particularly where you are setting out assumptions and desk guidance for the treatment of missing data points.

Fund names and disclosures

In order to include sustainability-related terms in the name of the fund, SFDR 2.0 moves away from the 80% threshold for aligned investments to prescriptive 70% minimums for categorised products. This is designed to allow more headroom for things like hedging instruments in the calculation. However, a review of existing fund names and their categories will be required to confirm that they will still comply.

We all breathed a sigh of relief on seeing that the disclosures of PAIs at entity level and the linkage of remuneration to sustainability have both been withdrawn. However, it is still likely/possible that some clients may ask questions around the manager’s approach to these two items in RFPs or as part of ongoing due diligence, so it may be worth keeping a stock answer to those items on file for future use, adapted from the current disclosures.

It isn’t yet clear how the fund-specific templates for pre-contractual disclosure and periodic reporting will change, and whether the ESAs will move away from very prescriptive templates to a more free-form design, yet stipulating required content.

What can you do now?

There are several steps regulatory and compliance teams can take now to smooth the journey.

1. Brief your stakeholders and boards Get your product managers, strategists, reporting and data teams up to speed on the key changes. Identify the challenges they will see with the new rules

2. Line up resources and budget Make sure that teams know this is coming. Project management resource is often scarce and in demand, so add to the pipeline as soon as possible. Additional legal/consultancy cost may be incurred to cover specific advice and filings with regulators etc.

3. Review existing product line-up Review your existing product range for compliance with the new categories, and consider how you would want to position them under SFDR 2.0. There may be an opportunity to start thinking about new strategies to plug any gaps. For those funds marketed in the UK, think about how products’ proposed SFDR corresponds to FCA’s Sustainability Disclosure Rules

4. Engage your data and ratings providers If you think you might have funds in the ESG Basics category, it will be good to know if your ratings provider will be seeking authorisation as an ESG Ratings Provider. How are benchmark providers thinking about the new regime? How do your sustainability data providers use estimates?

5. Review your portfolio monitoring systems and processes for ESG data Understand the capabilities of your portfolio compliance system and its ability to consume and process PAIs.

6. Monitor the ESAs’ proposal on the Delegated Act The consultation paper is often a good basis for preliminary project planning, and will help identify issues to bring to the authorities’ attention.

How can Orienta help?

We have prepared a high level business impact assessment of the proposal and would be happy to brief your stakeholders and expand on some of the topics covered above. In addition, we can coordinate and tailor an assessment for you and assist with project implementation. Please contact Darryl Cornelius at darryl.cornelius@orientaadvisory.com, or use the contact form here