SFDR 2.0: 40% of Article 9 funds at risk of breaching proposed exclusion rules

The European Commission’s reform of its Sustainable Finance Disclosure Regulation (SFDR) has a wide range of implications for fund managers. The reform – aimed at curtailing greenwashing – proposes investment exclusions to guide product classification.

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Research from Clarity AI – an analytics provider – shows misalignment between the new exclusion rules and funds currently classified under SFDR Article 8 and 9.  The former, under current rules, promotes sustainability objectives while the latter targets them.

Fund compliance

SFDR 2.0, expected to come into force in 2028, introduces a three-tier product classification system. ‘Sustainable’ funds form the highest sustainability category followed by transition funds and ESG basics.

Clarity AI’s analysis shows 40% of Article 9 and 80% of Article 8 funds would fail to meet exclusion criteria to be classified as ‘sustainable’ under the new rules. The research covered over 10,500 Article 8 funds and 920 Article 9 funds on the market.

The analysis focused on compliance with proposed exclusions under Paris-aligned benchmarks and climate transition benchmarks.

“SFDR 2.0 reflects a broader shift toward more robust and comparable sustainability labels in Europe”, commented Clarity AI’s ESG Risk Director Pablo Diaz-Varela.

“As minimum standards and exclusions become more prominent, the focus will increasingly move from how funds are described to what is actually held in portfolios. Ensuring that the two are aligned will be key to maintaining investor trust”, he adds.

For managers, misalignment with SFR 2.0 could trigger a strategic portfolio reshuffle to meet new standards. Asset managers adjusting holdings and screening processes in a bid to comply with rules, Clarity AI reckons, seems likely.

Delicate balance

Exclusion rules in the transition category bring into focus the balance between financing reduced emissions and reducing financed emissions. The current balance has drawn investor criticism.

Eurosif, an investor coalition, has warned against the risk of exclusions reducing capital available to fund credible transitions while welcoming exclusions for fossil fuel expansion.

Later this year, Europe’s lawmakers are expected to negotiate the proposed SFDR reform. Investor support and criticism of new rules will likely feed into these discussions, as will wider implications for Europe’s energy transition.

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