SFDR 2.0 and Article 9 reclassification risk

In late 2025, the European Commission proposed a full overhaul of the Sustainable Finance Disclosure Regulation (SFDR). Articles 8 and 9, which the market treats as de facto labels, would give way to three product categories built on minimum criteria. For fund managers, the stakes go beyond compliance: a poorly prepared Article 9 fund risks a costly reclassification, both for its reputation and its fundraising. The text is not yet adopted, but funds raised today may well live under both regimes. Here is what changes, why the risk is rising and how to prepare now.

1. What changes under SFDR 2.0

From a disclosure regime to a categorisation regime

Regulation (EU) 2019/2088 was designed as a transparency rule, not a label. In practice, the market read Article 8 as “light green” and Article 9 as “dark green”. The Commission acknowledges this in its legislative proposal: current disclosures are too long and too complex for investors to compare products.

SFDR 2.0 would therefore change the logic. It would create three categories: “Transition” (new Article 7), “ESG Basics” (new Article 8) and “Sustainable” (new Article 9). Each would require at least 70% of assets to meet the category’s objective, through binding elements of the strategy and appropriate indicators. Only categorised products could claim a sustainability dimension in their name and marketing. At this stage, all of these measures remain proposals.

The end of case-by-case “sustainable investment”

This is the deepest change. Today, an Article 9 fund must show that each holding is a “sustainable investment” under Article 2(17): it contributes to an objective, does no significant harm (DNSH) and follows good governance. The Commission confirmed this in its answers to the European Supervisory Authorities: the regulation sets no thresholds, and each manager alone bears the burden of its methodology.

The proposal would delete this definition and the DNSH test. It would replace them with three objective building blocks: the 70% threshold, mandatory exclusions and a list of eligible investments. For the “Sustainable” category, the list would include portfolios aligned with an EU Paris-aligned Benchmark (PAB), activities aligned with the EU Taxonomy and European Green Bonds. An open clause would allow other assets, subject to documented justification.

Principal adverse impact (PAI) indicators would still apply to “Transition” and “Sustainable” products. However, the Commission proposes to remove entity-level PAI disclosures.

Exclusions graded by category

Exclusions would build on the EU climate benchmark rules already used in ESMA’s guidelines on fund names. “ESG Basics” would exclude controversial weapons, tobacco, violations of the UN Global Compact and the OECD Guidelines for Multinational Enterprises, and companies deriving at least 1% of revenue from hard coal and lignite. “Transition” would add companies developing new coal, oil or gas projects and coal power producers without a phase-out plan. “Sustainable” would also apply the full PAB exclusions: revenue thresholds of 10% for oil, 50% for gas and 50% for electricity generation above 100 gCO2e/kWh.

A timeline still open

The Council adopted its negotiating position on 24 June 2026. The European Parliament’s ECON committee voted its own position on 10 September 2026, after nearly 600 amendments to the rapporteur’s initial draft report. A plenary vote was expected in October 2026, ahead of trilogue negotiations.

Estimates of what comes next diverge. Taken for granted, both the Council and the Parliament support a 24-month application period after entry into force. At this stage, in view of different opinions, an agreement is possible by to land in 2027, with application of SFDR 2.0 therefore to expect by end of 2029 latest. In the meantime, managers marketing funds in the EU need to make positioning decisions well before the new rules take effect. Now.

2. Why Article 9 reclassification risk is rising

A risk already present under the current regime

As early as July 2021, the Commission clarified that an Article 9 fund may only hold sustainable investments, apart from hedging and liquidity. The entry into application of the technical standards in early 2023 made this requirement concrete. Many managers then moved their funds to Article 8, in late 2022 and 2023, because they could not defend it holding by holding. ESMA’s final report on greenwashing also notes that several national authorities consider the definition of “sustainable investment” too vague to identify greenwashing cases. SFDR 2.0 would narrow the room for interpretation left to managers: criteria would become verifiable from the outside.

Three mechanisms tightening the screws

The first mechanism is the PAB exclusion. A current Article 9 fund may hold a company that earns a significant share of its revenue from gas, provided it justifies contribution and the absence of harm. In the “Sustainable” category, a company deriving at least 50% of its revenue from gaseous fuels would be excluded outright, as would any company developing new fossil fuel projects.

The second mechanism is the 70% threshold combined with a list of eligible assets. Holdings that fall under no listed type would need to be justified one by one. For impact and private markets funds, that justification requires robust indicators: our 8 principles for robust impact measurement offer a framework.

The third mechanism is the regulation of claims. Only categorised products could use sustainability terms in their names, and the term “impact” would be reserved for products pursuing a pre-defined, positive and measurable impact. Our briefing on preventing “SDG washing” sets out the questions to ask before any communication.

The case of gas and transition assets

Gas illustrates the shift well. The EU Taxonomy has recognised certain gas activities since the Complementary Climate Delegated Act, Regulation (EU) 2022/1214, applicable since 1 January 2023, under strict emissions and verification conditions. Aligned activities would be among the eligible investments of the “Sustainable” category. But eligibility is not enough: exclusions apply too. A new gas plant can be Taxonomy-aligned through a transitional route reserved for facilities permitted by the end of 2030: direct emissions below 270 gCO2e/kWh, or 550 kgCO2e/kW on average per year over 20 years, with a full switch to renewable or low-carbon gases by the end of 2035. Its operator may nonetheless be excluded, either for developing new fossil fuel projects or under the PAB threshold targeting producers that derive at least 50% of revenue from electricity emitting more than 100 gCO2e/kWh. How eligibility and exclusions interact, at issuer or project level, remains to be clarified.

The “Transition” category would then become the natural home for these assets. The Council proposes to admit fossil fuel companies that allocate at least 20% of their capital expenditure (capex) to Taxonomy-aligned activities and have a clear, time-bound emissions reduction strategy. The Parliament adds a capex comparison test over a rolling three-year period. The credibility of the transition plan therefore becomes central: our 4 questions to strengthen a net zero strategy serve as a first filter.

A national layer not to overlook

SFDR is not the only applicable rule. National supervisors and labels in distribution countries can add their own requirements. In France, for example, AMF Position-Recommendation DOC-2020-03 governs the non-financial disclosures of funds marketed to retail investors. National labels can also be stricter than SFDR on fossil fuels. Finally, any reclassification forces managers to revise pre-contractual documentation, inform investors and sometimes renegotiate commitments made in side letters.

3. How to manage reclassification risk

Step 1: choose the right target category at structuring stage

The first decision is strategic, not legal. A fund whose thesis rests on issuers in transition, including in energy, will sit more comfortably in “Transition” than in “Sustainable”. Conversely, a fund invested in assets already aligned with the Taxonomy or in projects with measurable impact can aim for “Sustainable”. The Commission’s proposal also provides an alternative route: a fund holding at least 15% Taxonomy-aligned assets, or replicating a PAB index, could access categories 7 and 9 without meeting the other criteria.

This choice must work under both regimes at once. Our Sustainable Finance, Impact & ESG team supports this mapping work. Our approach to impact fund design starts from the investment thesis rather than the label being sought.

Step 2: check whether the fund will be in scope

Not every fund will straddle both regimes. The proposal exempts closed-ended funds that no longer accept new investors on the date of application: they would continue to report under current SFDR. For a closed-ended fund whose final close comes before that date, the issue is therefore limited to the current regime. The Council and the Parliament also consider an exemption for certain funds reserved for per se professional investors, lost as soon as an ineligible investor comes in, including through a feeder. Both points should be confirmed with the fund’s legal counsel.

Step 3: map the portfolio holding by holding

Each target asset must be linked to an eligible investment type, with its justification. Three tests should run in parallel:

• the current Article 2(17) test, with a DNSH methodology based on explicit PAI thresholds;
• the exclusion screen of the target category, including new fossil fuel projects;
• Taxonomy alignment, isolating gas and nuclear as already required by Delegated Regulation (EU) 2023/363.

Social risks deserve the same rigour as climate. Our 5 human rights risk areas to assess investment decisions help document the “UN Global Compact and OECD Guidelines violations” test, which would remain an exclusion in all three categories.

Step 4: document and stress-test

A regulator does not judge intent; it judges evidence. The standard file includes the sustainable investment methodology, the exclusion policy and its data source, the asset mapping, the ramp-up plan and the data and estimates policy that the proposal asks managers to formalise.

For transition assets, the quality of transition plans must also be assessed. Our guide on financing the energy transition across operations and supply chains offers an operational reading. A double materiality analysis of issuers usefully completes this work.

Step 5: organise governance and documentation

The classification should be approved by the investment committee and reviewed at least once a year, with a clear reclassification trigger if a holding falls outside the criteria. The fund name and marketing materials should be reviewed against ESMA’s guidelines and any applicable national rules.

Fund documents should also anticipate the switch to SFDR 2.0 without requiring fresh investor consent for every adjustment. This means drafting the objective and binding elements in a way compatible with the target category, and providing for a realistic ramp-up period. Its maximum length is still debated: the Council proposes three years, while the Parliament sets no cap.

Step 6: engage early with investors

Institutional investors may expect alignment with the future category well before the rules apply. It is better to explain the fund’s trajectory early: current classification, target category, sensitive assets and planned treatment. A reclassification that is announced and explained is better received than one that is suffered. This dialogue also helps capture each investor’s own requirements, such as stricter fossil fuel exclusions or specific social indicators, and select from launch the indicators on which the fund will be judged throughout its life.

Navigate SFDR 2.0 with Ksapa

SFDR 2.0 would not make Article 9 out of reach. It would make it more objective, and therefore easier to verify. Managers who structure their funds now with a dual reading, current regime and future category, turn reclassification risk into a credibility advantage. Our Towards 2030 – 2026 update report places these issues in a broader frame: accelerating sustainability transformation to better manage uncertainty.

Choosing a target category, testing a portfolio against the new exclusions and building documentation that holds up under both regimes all call for expertise across regulation, climate, human rights and investment practice. Ksapa’s team of highly qualified experts combines sustainable finance advisory, impact fund design and human rights due diligence to help managers and investors structure credible products and stay ahead of supervisory expectations. Contact our team to discuss your fund and how to turn regulatory change into a lasting source of trust with your investors.

This article is provided for information only and does not constitute legal advice.

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