The European Parliament signalled that SFDR 2.0 is likely to become a narrower, more enforceable labelling regime than the Commission initially proposed in November 2025, raising the risk that fewer funds will qualify once negotiations conclude.

A report published this week by Gerben‑Jan Gerbrandy, the Parliament’s rapporteur on the Sustainable Finance Disclosure Regulation overhaul, sets out lawmakers’ opening position ahead of talks later this year. While it backs a shift to an explicit labelling system, it pushes for a stronger stance on engagement, higher thresholds, fewer automatic routes to qualification and stronger product‑level disclosures than those envisaged by the Commission.

Implications for Investors

The Parliament’s stance suggests that SFDR labels are intended to act as a hard gate rather than a broad classification tool. If this position survives trilogue negotiations later this year, some funds that would have met the Commission’s criteria could fall short under the final rules, particularly those relying on benchmarks, limited taxonomy exposure or narrative claims.

Engagement moves towards a baseline expectation

Although largely overlooked in much of the coverage to date, Gerbrandy’s proposal would require any categorised product to disclose its engagement strategy or justify its absence. This subtle shift from the Commission’s earlier approach, where investor engagement served merely as supporting evidence for products seeking a transition label. This change could prove to be highly consequential.

It reflects a broader regulatory shift in which engagement is being treated less as optional narrative context and more as evidence of intent and accountability. For investors, this would raise the bar from simply describing engagement to demonstrating how it is resourced, targeted and monitored.

Fewer shortcuts to qualification

One of the clearest signals in the draft report is Parliament’s reluctance to allow funds to qualify for SFDR labels through indirect routes. Gerbrandy proposes removing the safe harbour for products tracking EU Climate Transition or Paris‑Aligned Benchmarks, and raising the automatic qualification threshold for taxonomy‑aligned investments from 15 percent to 20 percent.

The effect would be to close off routes that, under the Commission proposal, could have allowed some borderline products to qualify without deeper scrutiny of portfolio construction, shifting the emphasis toward demonstrable substance across holdings rather than structural features.

Product‑level harm back in focus

The draft also takes a firmer line on Principal Adverse Impacts (PAI), one of the most contested elements of the SFDR framework.

The Commission proposed that funds explain potential environmental and social harms if they want to qualify for a label, while making PAI indicators themselves voluntary and dropping entity‑level disclosures. The aim was to reduce prescriptiveness and reporting burden.

Gerbrandy’s report pushes back by calling for a limited but mandatory set of PAIs to be disclosed for any fund seeking categorisation, while still avoiding a return to entity‑level reporting.

This re‑centres the regime on demonstrable harm at product level. In practice, data consistency, rather than data availability, is the binding constraint for many managers. A mandatory core set of PAIs would raise expectations around methodology, controls and auditability, not just disclosure.

Clearer lines for non‑labelled products

Another notable proposal is a mandatory disclaimer for non‑categorised products, explicitly stating that they do not qualify as sustainable.

While framed as a consumer protection measure, the practical effect would be to draw a much sharper line between labelled and unlabelled funds. Products currently sitting in the grey area between today’s Articles 6 and 8 would face more direct questions about how they are positioned, marketed and distributed, particularly in jurisdictions where SFDR categories have become shorthand for sustainability quality.

A more prescriptive endpoint in sight

The draft will now be debated in the Parliament’s Economic and Monetary Affairs Committee, with a vote expected in mid‑July, followed by wider parliamentary sign‑off and trilogue negotiations.

For investors, the question is no longer whether SFDR will change, but how much strategic value remains in pursuing a label once the political process plays out. The Parliament’s message is that labels should signal substance rather than minimal compliance, and some strategies may conclude that falling outside the regime is preferable to stretching to meet a narrowing definition.