Converting to the new SFDR 2.0 categories won’t always be a straightforward task for those currently under Article 8 or 9, write Melville Rodrigues and James Hay
The proposal for a new Sustainable Finance Disclosure Regulation (SFDR) 2.0 regime, published by the European Commission in late 2025, is positive for real estate funds. We welcome the reforms, particularly in the context of real estate fund managers looking to attract institutional capital to support transition strategies. However, a few challenges specific to the asset class need to be addressed.
To date, certain real estate investment strategies have struggled to find an appropriate home within the existing SFDR regime. In particular, retrofit investments and strategies to improve the environmental performance of real estate assets do not sit comfortably between the current Article 8 and 9 framework which hinges on whether the fund is making sustainable investments.
The new transition and sustainable product categories under the SFDR 2.0 proposal offer real estate fund managers more appropriate messaging regarding the sustainability aspects of their investment strategy. Investments to improve the sustainability of real estate assets through retrofit would sit comfortably in the new transition product category, while investments into (or the development of) real estate assets already meeting high sustainability standards would find a home in the sustainable product category which is similar to the current Article 9.
Converting from the current Article 8/9 to the new SFDR 2.0 product categories, though, may not always be easy. Although the new SFDR 2.0 proposal provides for preferential treatment for investments aligned with the EU Taxonomy (a classification system which sets a standard for environmentally sustainable activities), in practice many real estate investors have struggled with its technical complexity and it is not well suited for real estate assets outside of the EU.
The flexibility under the new rules to use other standards or in-house methodologies is therefore welcomed to enable real estate investors to embrace the new product categories without getting tied into specific frameworks. Nonetheless, when in due course the more detailed criteria are finalised, there may be practical challenges which might affect real estate. We recommend the regulators to permit industry to develop good practice standards (such as the ARESI White Paper on sustainability indicators for real estate) rather than mandate managers with strict criteria, recognising there must be minimum practice to prevent greenwashing.
SFDR 2.0 will introduce greater restrictions on what uncategorised funds will be permitted to say about sustainability. So, we encourage real estate investors with Article 6 funds to consider the new ESG basics category (similar to the current Article 8). Small uplifts could enable managers to categorise their funds, potentially attracting greater institutional capital.
Real estate managers that are looking for their funds to comply with both the UK’s Sustainability Disclore Requirements (SDR) labels and the SFDR 2.0 regime will need to address interoperability issues. Fortunately, the outlook is for the two regulatory regimes to be more closely aligned than they currently are. Although a possible extension of SDR to overseas funds was raised during the initial roll-out of SDR, we understand that HM Treasury will not consult on this in the short term.
For funds using the Sustainability Impact label under SDR, there is no equivalent product category under SFDR 2.0. Instead, fund managers will need to make additional impact-related disclosures. This means that fund managers will have to navigate the criteria for the new transition and sustainable product categories and draft their disclosures carefully. This is another opportunity for industry to develop good practice standards within the parameters of the new product categories.
Finally, the publication of the SFDR proposal has created an interim period which presents challenges for fund managers. During this period, funds may be launched under the old rules but will need to comply with the new. Therefore, we encourage a speedy legislative process to reduce market uncertainty with the risk of spillover effects into delayed fundraising.
With these prudent reforms, SFDR will continue to be a regime that importantly facilitates greater sustainable investment in real estate. Industry stakeholders must respond to the consultation on the proposal by 11 March 2026 to ensure SFDR 2.0 will work for real estate.
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