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SFDR Articles 6, 8 & 9 Explained – A Comprehensive Guide to ESG Fund Classification

Feb 19, 2025

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Majdouline Hakam

The Sustainable Finance Disclosure Regulation (SFDR) is a regulatory regime designed to enhance transparency in sustainable finance by ensuring that financial products provide clear and accurate information on how they integrate environmental, social, and governance (ESG) factors. By addressing transparency and preventing greenwashing, the regulation enables investors to make informed decisions regarding the sustainability attributes of financial products.

The SFDR classifies financial products into three categories—Article 6, Article 8, and Article 9—each with distinct disclosure obligations. This article provides an in-depth examination of SFDR Article 8, its regulatory requirements, and how it differs from Article 6 and Article 9 classifications.

What is SFDR? Why does it Matter?

The SFDR applies to financial market participants (FMPs) and financial advisers (FAs), including asset managers, investment firms, insurance companies, and pension funds operating within the European Union. The regulation mandates disclosures on how the entity integrates sustainability and requires financial products to be categorized based on their ESG characteristics.

For entity-level disclosures, the regulation mandates that all in-scope financial entities disclose their approach to sustainability. These disclosures align with Articles 3, 4, and 5 of the regulation and include: 

  1. Sustainability Risk Policies (Article 3) – Financial entities must outline how they integrate sustainability risks into their investment decision-making processes and risk management frameworks. This includes describing how ESG risks could impact the financial performance of investments.

  2. Principal Adverse Impacts (PAIs) Consideration (Article 4) – Entities must disclose whether and how they consider Principal Adverse Impacts (PAIs) of investment decisions on sustainability factors. If they do not consider PAIs, they must provide a clear justification. For entities exceeding 500 employees, this disclosure is mandatory. This is different from product-level PAI consideration, which is discussed later in this article.

  3. Remuneration Policy and ESG Integration (Article 5) – Entities must explain how their remuneration policies align with sustainability objectives. This includes ensuring that compensation structures incentivize responsible investment practices and the integration of sustainability risks.

These disclosures should be made publicly available on the entity’s website in a dedicated and easily accessible section (e.g. “Sustainability-Related Disclosures”).

SFDR Articles 6, 8 and 9

What is SFDR Article 6?

The SFDR Article 6 sets forth disclosure requirements for financial products that do not incorporate ESG factors as a component of their investment strategy. These products are not subject to the additional sustainability-related disclosure obligations required for Article 8 and Article 9 products. However, Article 6 mandates that entities disclose financial product information about:

  1. How sustainability risks are integrated into their investment decision-making process.

  2. The anticipated impact of sustainability risks on the financial performance of the product.

  3. If sustainability risks are deemed irrelevant, a clear explanation of why they are not considered.

These disclosures must be included in the fund’s private placement memorandum (PPM) to ensure transparency for prospective investors and any other relevant stakeholders.

What is SFDR Article 8?

Article 8 financial products are those that promote environmental and/or social characteristics, either individually or in combination. This category represents the most prevalent classification among ESG-related financial products in the market.

What Does an Article 8 Strategy Look Like?

The SFDR Article 8 classification provides a degree of flexibility regarding strategy implementation. However, the European Commission’s SFDR FAQ clarifies that “promotion” within Article 8 encompasses both direct and indirect claims related to ESG, including disclosures, reporting, product categorization, marketing materials, investment policies, and asset allocation that reflect the consideration of environmental or social characteristics.

Article 8 strategies vary widely, with some focusing on basic ESG integration, such as exclusionary screening, while others adopt more ambitious approaches incorporating targeted ESG criteria. Regardless of approach, an Article 8 fund must comply with the following core principles:

  1. Promotion of environmental and/or social characteristics within its investment strategy.

  2. Implementation of sustainability indicators that are systematically monitored and reported.

  3. Adherence to good governance practices, including sound management structures, employee relations, remuneration policies, and tax compliance.

  4. Binding elements integrated into the process to select the investments.

  5. Optional consideration and reporting of Principal Adverse Impacts (PAIs) on sustainability factors.

  6. Determination of sustainable investment allocation, including whether the fund commits to making sustainable investments and, if so, the percentage of the portfolio allocated to such investments.

Reporting Obligations for Article 8 Funds

Financial products classified under Article 8 must adhere to the following disclosure requirements:

  1. Pre-contractual disclosures utilizing the official SFDR Annex II Template. 

  2. Website disclosures outlining sustainability characteristics and investment methodologies.

  3. Annual periodic reports detailing the fund’s sustainability performance, utilizing the official SFDR Annex IV Template.

What is an Article 8+ Strategy?

The term Article 8+ has emerged in market practice to describe financial products that promote environmental and/or social characteristics while also incorporating a proportion of sustainable investments. This approach represents a blended strategy, combining characteristic promotion with the intentional allocation of sustainable investments.

What is SFDR Article 9?

Article 9 products are financial products with an explicit sustainable investment objective. Unlike Article 8 products, the term “sustainable investment” is strictly defined within Article 2(17) of SFDR:

A sustainable investment is an investment in an economic activity that:

  1. Contributes to an environmental or social objective (e.g., climate change mitigation, biodiversity conservation, social equity).

  2. Does not significantly harm other environmental or social objectives.

  3. Follows good governance principles (sound management structures, employee relations, remuneration policies, and tax compliance).

Core Characteristics of SFDR Article 9 Funds

  1. Must have a sustainable investment objective, aligning with the SFDR’s definition.

  2. 100% of the financial product’s investments must qualify as sustainable investments.

  3. Must establish and track sustainability indicators to measure progress toward the attainment of the fund’s sustainable investment objective.

  4. Must ensure the “Do No Significant Harm” (DNSH) principle by assessing and mitigating any negative externalities.

  5. Mandatory reporting on Principal Adverse Impacts (PAIs). Reporting on PAIs fulfills the DNSH requirement mentioned above. 

Reporting Obligations for Article 9 Funds

Article 9 products follow reporting obligations similar to Article 8, with the following distinctions:

  1. Pre-contractual disclosures using the Article 9 SFDR Annex III template.

  2. Website disclosures that detail sustainability methodologies and alignment with objectives.

  3. Annual periodic reporting following the Article 9 SFDR Annex V template, ensuring transparency on sustainable investment performance and mandatory PAI tracking.

What are Principal Adverse Impacts (PAIs)?

Principal Adverse Impacts (PAIs) are metrics designed to assess the negative environmental, social, and governance effects of investments. The SFDR Regulatory Technical Standards (RTS) classify PAIs into three categories:

  1. Table 1: Core mandatory PAIs (e.g., GHG emissions, water consumption, board diversity, gender pay gap).

  2. Table 2: Additional climate and environment-related PAIs.

  3. Table 3: Additional social and governance-related PAIs.

Article 8 funds may voluntarily track PAIs - unless they commit to a percentage of sustainable investments - while Article 9 funds are required to monitor and report PAIs as part of their sustainable investment framework and to comply with the DNSH principle of the SFDR.

What's Next for the SFDR?

Since its implementation in 2021, SFDR has undergone continuous development, shaped by key milestones such as the SFDR Delegated Act (2022), the Joint Consultation Paper on PAI methodologies (2023), as well as various FAQs, position papers, and ESMA reports. 

In December 2024, the Platform on Sustainable Finance - an advisory body to the European Commission - published a briefing document proposing substantial revisions to the SFDR product classification system, including the introduction of new product classification categories. 

While no official regulatory changes have been implemented yet, this initiative aims to provide clearer differentiation of financial products based on their sustainability objectives and strategies.

The proposed framework suggests four categories:

  1. Sustainable: Investments in assets that are already sustainable.

  2. Transition: Investments in entities or activities that are on a path toward sustainability, such as companies with credible transition plans.

  3. ESG Collection: Investments that apply sector-based screening or exclusion strategies to enhance ESG performance.

  4. Unclassified: Financial products that do not fall in any of the three categories but will still have some reporting obligations. 

These refinements are intended to reduce greenwashing risks while ensuring investors can clearly distinguish between products designed for sustainable investment, transition financing, or ESG-focused selection criteria.

While it remains uncertain whether these proposals will be adopted into regulation, they indicate a potential shift toward a more comprehensive transformation of SFDR reporting. Market participants should stay vigilant and be ready to adapt their investment disclosures in response to any forthcoming updates.

FAQs

What are the requirements for SFDR Article 8?

SFDR Article 8 funds must promote environmental and/or social characteristics, follow good governance practices, and disclose how these characteristics are considered in investment decisions. They are required to provide pre-contractual, website, and periodic disclosures to ensure transparency.

What is the difference between SFDR Article 8 and Article 9?

The key distinction is that Article 8 funds promote environmental and/or social characteristics, whereas Article 9 funds have a sustainable investment objective. Article 9 products must ensure that 100% of investments qualify as sustainable investments under SFDR Article 2(17) and must report on Principal Adverse Impacts (PAIs) to comply with the Do No Significant Harm (DNSH) principle.

What is SFDR Article 6?

SFDR Article 6 funds are financial products that do not promote ESG characteristics or have a sustainable investment objective. However, they must disclose how sustainability risks are considered in the investment decision-making process, if at all. 

What is SFDR Article 8?

SFDR Article 8 funds are financial products that promote environmental and/or social characteristics, provided that the companies in which they invest follow good governance practices. These funds must provide transparency regarding their sustainability approach and relevant indicators.

What is SFDR Article 9?

SFDR Article 9 funds have a sustainable investment objective and must ensure that 100% of their investments qualify as sustainable investments under SFDR Article 2(17). They are also required to track and report Principal Adverse Impacts (PAIs) to comply with the Do No Significant Harm (DNSH) principle.

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