SFDR 2.0: A step towards making sustainable investment work in practice

A major milestone in the SFDR review has been reached – and it is good news for private equity and venture capital.

The Council has agreed a series of important improvements that move SFDR closer to what the industry has been calling for – a framework that supports sustainable investment rather than creating unnecessary complexity.

For private market investors, this is more than a technical update. It is a recognition that private equity and venture capital invest differently, generate value differently and contribute to sustainability differently than many public market strategies.

The Council’s agreement introduces greater flexibility, better reflects how professional investors operate and provides fund managers with a more practical framework for investing in the sustainable transition of the real economy.

In short: less box-ticking, more focus on outcomes.

Professional investors don’t need retail-style labels

One of the most significant improvements is the introduction of an opt-out from the categorisation regime for certain funds marketed exclusively to professional investors.

This recognises a simple reality: institutional investors do not make investment decisions based on labels alone.

Professional investors conduct detailed due diligence, negotiate bespoke ESG requirements and assess sustainability risks and opportunities directly with managers. For these investors, sustainability is already embedded into investment processes and manager selection.

The Council’s approach acknowledges these established market practices and creates a more proportionate distinction between retail and professional markets. It preserves investor protection where it matters most while recognising the specific characteristics of professional investor markets.

Better disclosures, not more disclosures

The Council has also introduced greater flexibility into sustainability reporting requirements.

Rather than forcing managers to report against indicators that may not fit their strategy or portfolio, the revised approach allows a stronger focus on metrics that are genuinely relevant to a fund’s sustainability or transition objectives.

That matters for private market investors.

Private equity, venture capital and infrastructure funds invest across different sectors, business models and stages of growth. What constitutes meaningful sustainability performance can vary significantly from one investment strategy to another.

The Council’s approach should help shift the focus away from reporting for reporting’s sake and towards disclosures that provide investors with information they can actually use.

More certainty for long-term investors

The agreement also introduces a more pragmatic implementation timeline.

With a longer transition period and a more realistic review horizon, fund managers will have more time to adapt structures, reporting systems and investment processes.

For an industry built around long investment horizons, predictability matters. Greater legal certainty allows managers to focus on building portfolios and creating value rather than constantly adapting to regulatory change.

A framework that better reflects how private capital drives transition

The Council has also taken important steps to better accommodate private market investment strategies.

The text explicitly recognises the contribution that private and real assets can make towards sustainability objectives and adopts a more practical approach to transition finance.

This is particularly important because many of the companies that need capital to decarbonise, innovate and transform their business models are financed through private markets.

The Council’s approach better reflects the reality that sustainability is often achieved through active ownership, long-term engagement and supporting companies through their transition journey – not simply by investing in businesses that have already reached their destination.

The work is not finished

While the Council agreement represents a significant step forward, more work remains to be done. We look forward to continuing our close engagement with co-legislators ahead of, during and beyond the trilogue phase to further strengthen the framework and ensure it fully supports the mobilisation of private capital towards Europe’s sustainability and competitiveness objectives.

In particular, Invest Europe will continue to advocate for greater flexibility in sustainability communications for professional investors, especially for non-categorised funds; stronger safeguards for confidential information shared with professional investors; and a framework that fully recognises engagement-based investment strategies and the practical realities of private equity and venture capital investing.

But the direction of travel is now clear.

The Council’s agreement signals a growing recognition that sustainable finance rules should help channel capital towards sustainable outcomes in the real economy – not create unnecessary barriers for the investors providing that capital.

For private equity and venture capital, it marks an important step towards a more practical, proportionate and investment-friendly SFDR framework.