The European Commission’s proposed SFDR 2.0 framework could significantly reshape how sustainable investment products are positioned in Europe. Clarity AI’s analysis estimates that around 40% of today’s Article 9 funds, the EU’s highest sustainability category, would not meet the proposed exclusion rules. The gap is even wider for Article 8 funds, where roughly 80% would fail the proposed Sustainable exclusions.
These estimations suggest that a substantial number of funds currently marketed as sustainable could face strategic choices if managers aim to position them under the stricter standards attached to the new labels. This could involve tightening exclusion policies, adjusting portfolio holdings, or reconsidering how funds are positioned within the sustainable investment landscape.
In November 2025, the European Commission published its SFDR 2.0 proposal, which would replace the current Article 8 and 9 framework with three new product labels — Transition, ESG Basics, and Sustainable1. Each label would be subject to harmonised minimum standards, including a requirement that at least 70% of their assets contribute to their given sustainability-related objective, as well as hard negative exclusions based on the Paris-aligned and Climate-transition benchmark exclusionary criteria.
Paris Aligned Benchmark exclusions:
(a) companies involved in any activities related to controversial weapons;
(b) companies involved in the cultivation and production of tobacco;
(c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
(d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
(e) companies that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
(f) companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels;
(g) companies that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100g CO2 e/kWh.
While the framework would not automatically reclassify existing funds, it introduces clearer benchmarks for how sustainability claims may be defined under the next phase of EU regulation, a development that could influence both product design and investor expectations as the market adapts to the new framework.
How ready are today’s SFDR funds?
To assess the potential implications of the proposal, Clarity AI analysed a sample of more than 21,100 investment funds currently self-classified under SFDR (9,600+ Article 6, 10,500+ Article 8, and 920+ Article 9 funds).
The analysis focused on one core question: would these funds meet the proposed Paris-aligned and Climate Transition Benchmarks (PAB and CTB) exclusion criteria under SFDR 2.0?
Clarity AI assessed funds’ potential compliance with the new exclusion requirements for Article 7 (“Transition”), Article 8 (“ESG Basics”), and Article 9 (“Sustainable”)2.
The results: sustainability claims under pressure
The findings show how today’s portfolios align with the exclusion standards associated with the proposed labels, providing an early indication of how funds may position themselves under the new framework.
- Of the funds currently self-classified as Article 6, approximately 20% meet the proposed Article 7/8 (“Transition”/“ESG Basics”)3 exclusion requirements, and only about 10% meet those for the proposed Article 9 (“Sustainable”).
- Among the Article 8 funds, roughly 35% meet the proposed Article 7/8 exclusions, while only around 20% pass the proposed Article 9 exclusion requirements.
- Even among the funds currently classified as Article 9, fewer than 70% meet the proposed Article 7/8 exclusions, and around 60% satisfy the proposed Article 9 exclusions.
A closer look at the underlying exposures helps explain why many funds fail to meet the proposed exclusion thresholds.
- Among Article 8 funds that do not meet the ESG Basics exclusions, just over 40% of failures are linked to breaches of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises, with exposures highly concentrated in a small number of companies. A similar percentage corresponds to cases driven by companies that derive 1% or more of their revenues from hard coal and lignite activities. These exposures are more widely distributed across companies rather than concentrated in a few issuers. The remaining share is primarily explained by tobacco-related exposure and controversial weapons.
- A similar pattern emerges among Article 9 funds that fail the proposed exclusions. Again, a meaningful share of failures is linked to Global Norms breaches involving the same set of companies, while around 40% are driven by exposure to fossil fuel activities such as coal, oil, and gas. A smaller share is explained by exposure to high-intensity electricity generation.
Why this matters beyond compliance
These findings provide an early indication of how current fund portfolios align with the exclusion standards proposed under the SFDR 2.0 framework. The relatively low percentage of funds meeting the stricter exclusion thresholds suggests that a substantial portion of funds currently classified under Articles 8 and 9 may need to adjust their existing holdings or enhance their screening processes if they intend to align with the proposed labels.
This concern is reinforced by the overlap between the Commission’s proposal and ESMA’s fund naming rules, both of which require sustainability claims to be supported by portfolio characteristics. As highlighted in Clarity AI’s 2025 research, this points to a disconnect between sustainability labels and actual exclusions at the portfolio level.
Although the regulation is unlikely to apply before 2028 and is still under negotiation, its strategic implications are immediate. Portfolio realignment, prospectus updates, benchmark changes, and investor communication processes require time and coordinated governance. Stronger exclusion regimes also depend on reliable issuer data, controversy monitoring, and ongoing screening systems, which may require operational upgrades.
Overall, this is not just a future compliance issue but an early signal of how portfolio construction and product positioning will need to evolve. Even if specific rules change, exclusions are set to become more central in defining sustainable funds, making early preparation essential to reduce the risk of future disruption.
Next Steps for SFDR 2.0
In mid 2026, the European Parliament and the Council are expected to finalise their positions on the Commission’s proposal, enabling the three parties to enter into trilogue negotiations later this year. A political agreement could follow in 2027, with the new regulation likely to come into force not earlier than 2028.
Nov 20,2025
Official legislative proposal for SFDR 2.0 published by the European Commission .
2026-2027
EU-level negotiations and possible amendments. No fixed dates for final approval, as the process depends on the speed of legislative review. Once political agreement is reached, 18 months of transition period.
Early 2028
Earliest expected implementation, following parliamentary approval and publication in the EU Official Journal.
Further clarity will also come from the Commission’s publication of its “level 2” technical standards, which will define important aspects of the regulation, including specific indicators for contribution criteria and reporting templates.
While the timeline appears generous at surface level, preparation cannot be left to the final stages. For Article 8 and 9 funds, this may involve mapping their existing products to the new categories. For other funds, including current Article 6 products, firms will need to determine whether they can qualify under one of the three labels (Transition, Basics, or Sustainable). Under the Commission’s proposal, funds that do not fall within one of these categories would be restricted from using certain ESG or sustainability-related terms in their names and marketing materials.
Beginning this assessment early allows firms to implement any necessary portfolio, documentation, or positioning changes in a measured way, reducing execution risk, maintaining investor confidence, and mitigating potential greenwashing concerns as regulatory expectations evolve.
A practical tool for exploring SFDR 2.0 alignment
To support market participants in understanding the potential implications of SFDR 2.0 as it stands today, Clarity AI has developed the SFDR 2.0 Check, a publicly available tool that provides an early, indicative view of how funds may align with the European Commission’s proposed product categories.
Users can input a fund ISIN and assess performance against key elements of the proposal, including exclusion requirements, based on currently available data. By offering a consistent, data-driven way to explore the proposed framework, the SFDR 2.0 Check helps asset managers, analysts, and other stakeholders get a quick view of the potential impact of the proposed reforms, ahead of final rules and technical standards.
As an immediate next step, Clarity AI is already working on an SFDR 2.0 solution to support clients through the transition, from identifying and classifying existing funds to tailoring the design of new products aligned with a predetermined objective.
References
- Transition (Article 7): Investments on a credible path to sustainability or pursuing specific transition-related objectives.ESG Basics (Article 8): Products that incorporate sustainability considerations beyond sustainability risks within their investment strategy.Sustainable (Article 9): Investments that are already sustainable or that pursue specific sustainability-related objectives.
- To assess the proposed Article 7 & 8 exclusions, each holding was evaluated against Paris-Aligned Benchmark (PAB) criteria a–d, covering key exclusion areas such as fossil fuel activities, controversial weapons, and severe norm breaches (see here for full criteria definitions). Limited exceptions were applied for certain sustainable bonds that met ESMA’s requirements under the sustainable fund naming rules. The same approach was applied to assess the proposed Article 9 exclusion requirements, using the broader PAB criteria a–g, with similar exceptions. In both cases, a fund was classified as non-compliant if it contained even a single holding in breach of the relevant criteria.
- The analysis focuses on the proposed exclusion requirements for Articles 8 (“ESG Basics”) and 9 (“Sustainable”), which are directly comparable across fund classifications. The core exclusion framework applied under Articles 7 and 8 is largely aligned.
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