Hedge funds are poised to avoid new EU rules requiring investment managers to categorize products as ESG or non-ESG. Cyprus, holding the EU's rotating presidency, has drafted a proposal that would exempt alternative asset managers selling to professional investors from these disclosure requirements.

The exemption forms part of the EU's overhaul of the Sustainable Finance Disclosure Regulation, launched in 2021 amid criticism for failing to prevent greenwashing. Regulators are now establishing stricter labeling frameworks for ESG funds while limiting what managers can claim about non-ESG products.

Adam Jacobs-Dean of the Alternative Investment Management Association noted that SFDR categories were designed for long-only approaches, creating misalignment for hedge fund strategies. The proposal would remove restrictions on how non-ESG funds discuss sustainability strategies, allowing managers to explain approaches without forcing products into ill-fitting categories.

This marks another regulatory win for the asset management industry, which has actively lobbied against expanding ESG compliance burdens. Final approval from EU member states and parliament is still pending, but the move signals growing recognition that one-size-fits-all ESG rules may not suit all investment strategies.