Upright's take: SFDR 2.0 ends ESG label inflation. Here’s how serious investors respond with data.

Over the past three years, the European sustainable finance market has used SFDR 1.0 in a way it was never meant to be.

What was designed to be a disclosure framework was treated as a labeling regime – leading Article 8 to become an unambitious catch-all category housing over 50% of EU funds, regardless of how they actually performed on sustainability.

That era is ending.

The European Commission’s SFDR 2.0 proposal, published in November 2025, is a fundamental, structural reset. The market is moving from a transparency regime (“tell us your policy”) to a categorisation regime (“prove you meet the standard”). For investors, that means fewer sustainability narratives and more numbers – a welcome maturation of the sustainable investing market toward a quantitative, evidence-based approach.

Here’s what SFDR 2.0 actually says, and how investors can start preparing now.

Quick orientation: SFDR 2.0 brings new categories, higher bar

SFDR 2.0 drops the confusing Articles 6/8/9 system and replaces it with three formal, voluntary product categories. To use any sustainability-related terms in fund marketing or naming, asset managers must opt into one of these categories and meet binding criteria:

1. Transition (Article 7): For products with a "clear and measurable transition objective" related to sustainability factors, investing in the transition of undertakings towards sustainability.

2. ESG Basics (Article 8): For products that "integrate sustainability factors" in their investment strategy beyond the mere consideration of sustainability risks.

3. Sustainable (Article 9): For products that invest in sustainable undertakings or activities and pursue "clear and measurable sustainability-related objectives."

The qualification mechanics

To qualify, 70% of fund assets must meet the criteria for the selected category. For Transition and Sustainable funds, that means demonstrating contribution to a defined sustainability objective. Funds with 15% EU Taxonomy alignment automatically meet this bar.

Also gone is the vague definition of “sustainable investment” from Article 2(17). In its place are category-specific standards that remove the ambiguity around DNSH (Do No Significant Harm).

Exclusions are now binary. DNSH is replaced with strict exclusion lists aligned with PAB and CTB standards – including strict bans on new fossil fuel projects.

The death of narrative, the rise of evidence 

Under SFDR 1.0, the "Sustainable Investment" definition was so vague that asset managers often relied on legal teams to draft qualitative defenses of their assets. Under SFDR 2.0, that burden shifts from legal interpretation to data science.

To enter the Sustainable (Art 9) or Transition (Art 7) categories, funds must prove their 70% quota using "appropriate sustainability-related indicators" linked to a "clear and measurable objective."

This marks a clear shift in requirements: It is no longer enough to rely on a policy document that claims to "promote" environmental characteristics. Managers need to use evidence-based, quantitative methods that sum up the sustainability contribution of every asset in a portfolio to verify if the 70% floor is met.

As a result, data strategies that rely solely on semantic analysis of corporate policies may prove insufficient. The new regime inherently favors methodologies capable of quantifying positive contribution and verifying eligibility against hard numerical thresholds.

"Impact" is now a restricted term

For high-conviction strategies, one of the most significant changes is the formal protection of the term "impact."

Previously, “Impact” was often used loosely across the market. Under SFDR 2.0, it becomes a legally protected term. Going forward, only Transition and Sustainable funds can use “impact” in their names or marketing – and only if they can prove:

• Intentionality: A defined social or environmental goal.
• Measurable outcomes: Quantitative evidence of results.
• Theory of change: A clear explanation of how the investor contributes to those outcomes.

This creates a premium tier in the market. Standard ESG ratings will not be enough – investors need rigorous data on positive outcomes and real-world contributions to justify the label.

Estimates are formally in for private markets

For Private Equity and Private Credit, the final SFDR 2.0 proposal confirms that funds marketed to professional investors are fully in scope for the regulation. The "opt-out clause" in the earlier leaked draft is gone. 

While this imposes new requirements, the regulator has simultaneously offered a critical tool to meet them.

Crucially, the new Article 12a explicitly validates the use of estimates and third-party data where reported data is unavailable, as long as they are based on formalised, documented methodologies. This enables outside-in modeling to fill data gaps, especially where portfolio companies don’t report.

This means GPs do not need to wait for their portfolio companies to produce perfect sustainability reports before categorising a fund. They can confidently use rigorous outside-in estimation to assess eligibility and screen for exclusions today.

Furthermore, a new "Phase-In Period" allows funds to disclose a target timeline for reaching the 70% threshold as capital is deployed, aligning compliance with the investment lifecycle.

The PAI reset shifts resources from admin to insight

The Commission has clearly listened to the industry’s complaints about bureaucracy.

Entity-Level PAI reporting is removed, reducing the burden of aggregating thousands of data points just for firm-wide compliance – a clear signal from the Commission that data collection for its own sake is not the goal.

However, principal adverse impacts (PAI) are not disappearing. Product-level PAI reporting remains mandatory for both Transition (Art 7) and Sustainable (Art 9) funds.

The difference is in the application: instead of a compliance checkbox, PAIs become a vital tool for due diligence and demonstrating the "Do No Significant Harm" standards required for these high-conviction labels.

Article 12a plays a critical role here, too: it explicitly validates the use of estimates for PAI indicators. Investors can now use smart data modeling to fill gaps, instead of requiring every portfolio company to produce a polished sustainability report. That means portfolio companies’ limited resources can go to actual sustainability efforts – not to meaningless templated disclosures.

Conclusion: Strategic implications for investors

The final rules are still in draft form, and implementation is likely around 2028, so there is no need for immediate panic. But the direction of travel is set, and it calls for a rethink of how sustainability data is sourced and used.

Rather than waiting, investors should start stress-testing their flagship funds against the 70% rule now. This is not about re-labeling – it’s about seeing whether your current data stack can quantify contribution in a way that meets the new bar.

Two long-term shifts we recommend investors to focus on:

1. Ensure eligibility early

While the deadline is distant, the 70% threshold is a high bar. Use this period to shadow test flagship funds – and assess whether your current data stack can measure contribution under the new Articles 7 and 9. As the market moves from broad coverage to specific evidence, the ability to quantify measurable objectives will be key to a smooth transition.

2. Shift focus from collection to contribution

The end of entity-level PAI reporting signals that the regulator sees little value in aggregating thousands of data points for the sake of compliance. Instead of chasing every portfolio company for disclosure scraps, allocate resources toward robust, fit-for-purpose data that measures the actual relevant indicators required for the new categories.

How Upright’s data engine helps investors with SFDR 2.0

The shift from "disclosure" to "categorisation" aligns with the core philosophy of Upright’s data model: measuring contribution based on companies’ business activities and scientific evidence, not on reported corporate policies.

How our data supports investors with the transition:

• Calculate 70% eligibility: Upright’s various positive contribution metrics provide the quantitative evidence needed to determine which assets meet the "measurable objective" threshold for the new Transition and Sustainable categories.
• Cover private markets data gaps: Our model delivers Article 12a-compliant estimates for any private company – no need to wait for disclosures or suffer data gaps.
• Earn the "impact" label: To use the protected term "impact," funds need to prove intentionality and measurable outcomes. Upright’s data quantifies the real-world positive and negative impacts of products and services, giving investors the rigorous evidence required to justify the premium label.

Want to discuss your data strategy for SFDR 2.0?

Get in touch for a discovery demo.