D. A. Carlin & Co Analysis: The reform is designed to bring clarity that the market has lacked since 2021.
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For years, SFDR has tried to play two roles at once: a disclosure framework and a de facto product labelling regime. That combination has not served investors particularly well. Disclosures have become long, technical, and difficult to compare.
Labels such as Article 8 and Article 9 have been stretched across products with very different sustainability profiles. Market participants, and especially retail investors, have struggled to distinguish between funds with real sustainability ambitions and those making lighter claims.
The European Commission has now proposed a major overhaul of SFDR. The reform is designed to bring clarity that the market has lacked since 2021. It simplifies the rulebook, strengthens expectations for products that wish to make sustainability claims, and reduces the compliance burden where disclosure has become duplicative.
The reforms also raise the bar for using sustainability language in product names and marketing. These changes will materially alter both investment practices and product governance across Europe.
This article sets out the core changes and explains why they matter for managers and asset owners. It concludes with practical steps firms should take now to prepare for the transition to SFDR 2.0.
A New Product Categorisation System
The most significant change is the replacement of today’s Article 8 and Article 9 with a new, clearer categorisation system. Three categories are proposed:
Article 7 — Transition
These products invest in companies and projects on a credible path toward improved environmental or social performance. As with Article 9, 70 percent of the portfolio must support that transition objective. A slightly lighter set of exclusions applies. Transition funds must report principal adverse impacts (PAIs) at the product level and must define sustainability indicators that measure progress.
Article 8 — ESG Basics
These products integrate sustainability factors beyond pure risk management, but do not commit to a transition or sustainability objective. They must also meet the 70 percent alignment requirement and a limited exclusion list, but do not need to report PAIs.
While the terminology resembles the existing categories, managers should not assume that an existing Article 8 or Article 9 fund will map neatly onto the new system. The bar is higher, the exclusions are stricter, and the 70 percent alignment test is central.
Article 9 — Sustainable Features
These products invest in assets that are already sustainable or that pursue a dedicated sustainability objective. To qualify, at least 70 percent of the portfolio must support that objective. Mandatory exclusions include controversial weapons, tobacco, violations of UN Global Compact and OECD Guidelines, and fossil fuel activities above defined thresholds.
Power generation exceeding 100g CO₂e per kWh and any new coal, oil, or gas exploration projects are also excluded. For the hardest-to-meet criteria, the Commission introduces a helpful bridge: if 15 percent of the portfolio is EU Taxonomy aligned, this will count as sufficient to meet the 70 percent requirement.
A Fourth Option: Article 9a for Mixed Asset Strategies
The proposal recognises the reality of multi-asset and private market strategies. Article 9a is not a formal label but an option for funds combining Article 7 and Article 9 investments. The portfolio must still achieve 70 percent alignment with its stated objective. This option will matter for private equity, infrastructure, and real assets, where ramp-up periods and diversified holdings are common.
Notably, the Commission gives long-requested relief to private market funds by allowing a phase-in period before the 70 percent threshold must be reached. This phase-in must be disclosed upfront and reached before the period expires.
Ending ESG-Lite Claims
A new Article 6a regulates products that fall outside the three main categories. These funds cannot use ESG terminology in their names and can only include very limited references to sustainability. These references must be secondary to the fund’s primary characteristics and represent less than 10 percent of the overall product description.
This is a direct response to concerns about greenwashing and is likely to push managers towards choosing whether to commit to a category or drop sustainability language entirely.
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investESG
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