SFDR 2.0: From Labels to Leadership – Why It Matters Now
- Karteria Partners
- Jan 13
- 5 min read
European legislation has driven market adoption of sustainable investment substantially over the past investment cycle. However, it has also led to a host of unintended consequences and created uncertainty and confusion within the real estate sector. An update was long overdue, though only time will tell whether the next iteration achieves its goals.
As for how this is relevant for the industry, here Meike sets out what this means and what we need to do to prepare.
A Steep Learning Curve
SFDR has delivered a step change in sustainable finance transparency since 2021 – but those of us who were involved in creating the first Article 8 and Article 9 investment vehicles know all too well it was a ‘beta version’. And with any beta version it was a ‘learning while using’ approach, accelerating market response but with a significant level of ambiguity – especially for a sector which contains real assets.
In practice it created fragmented, hard-to-compare disclosures and an unintended market shorthand: Article 8 and 9 quickly became somewhat of a marketing label.
Real estate and infrastructure funds overwhelmingly opt for Article 8 classification but even impact-driven real asset funds avoid Article 9 status – regarded as “too risky” or impractical under SFDR’s current rules – and instead promote ESG characteristics under Article 8.
Additionally, due to its inherent structure, it failed to stimulate the “brown-to-green" transition of underperforming real assets, much to the frustration of those who specialise in buying and upgrading underperforming assets (some might still like to call them ‘stranded’) as their sustainable business model.
Lessons Learned - Why SFDR 2.0 Is A Turning Point
The European Commission’s November 2025 proposal to amend SFDR is a direct response to some of the initial key shortfalls, market response and international criticism of Europe’s penchant for complex and impractical legislation. It aims to simplify disclosure, reduce greenwashing risk and create a clearer product categorisation system that better matches how products are designed, governed and sold.
What is changing under the Commission’s proposal?
The centre of gravity shifts from “Article 8/9 marketing” to three more robust sustainability-related product categories: Transition - ESG Basics - Sustainable.
For the new categories, the proposal introduces a quantitative backbone: at least 70% of investments would need to align with the chosen sustainability strategy, with the remainder limited to diversification and technical needs, and without undermining the product claim.
From “Do you disclose?” to “Do you Mean It?”
In recent years, supervisory attention has shifted from “do you disclose?” to “do you mean it?”. The Commission explicitly notes that Article 8/9 disclosures have been used in a misleading way to categorise products as “sustainable” without the necessary criteria. At the same time, ESMA’s fund name guidelines and supervisory actions have raised the bar for consistency between name, marketing, binding investment criteria and the actual portfolio.
In an attempt to combat greenwashing the Commission also signals a tighter link between product categorisation and the use of sustainability related claims in fund names and marketing. In fact, a newly proposed Article 6A regulates products that do not meet any of the three main categories. They are not permitted using ESG terminology in their names and other references to sustainability are very restricted. In a nutshell: You are either in or out.
Regulatory risk: mis-labelling is now a supervisory and reputational issue
Risk or Opportunity?
If Article 8/9 is treated as a badge rather than a disclosure framework, firms can end up with product claims that are stronger than the underlying binding criteria. It is no surprise, therefore, that we have been seeing Article 9 funds ‘downgrading’ to Article 8 to reduce regulatory and reputational risk.
SFDR 2.0 sets rules around grandfathering rights and the need to reposition those who do not fall into that category. While it is still very much under consultation, the trajectory is clear: current Article 8 & 9 fund managers should start looking at the underlying opportunities and risks coming with SFDR 2.0 now.
SFDR 2.0’s emerging Transition category is a practical entry point for those managers wanting to allocate capital to real economy decarbonisation, without forcing everything into a “Sustainable” box. For real assets and private markets in particular, Transition can better reflect how value is protected and created: sequencing capex, upgrading energy systems, and proving measurable improvement over time. This presents a great opportunity for existing funds as well as a practical solution for new brown-to-green investment vehicles to enter the market.
How to Design A Credible Transition Fund
While detailed requirements are still under development, the principles for a robust transition plan can already be initiated into the design process:
Define a clear transition objective
Avoid broad slogans. Specify the pathway, the time horizon and the measurable outcome you are underwriting.
Operationalise the 70% bucket
Define which investments qualify, how you treat cash/hedging, and how you manage temporary breaches and phasing.
Choose realistic KPIs that can be monitored
Select a small set of portfolio-level and asset-level KPIs (e.g., emissions intensity pathway, capex alignment, energy performance trajectories) and ensure data robustness and availability. Be transparent about assumptions where your own data is scarce.
Set exclusions and red lines that support naming claims
Align exclusions to the claims you use and document the rationale to ensure they can withstand supervisory and investment scrutiny.
Once the thresholds and taxonomy for SFDR 2.0’s Transition funds are released, finalise the governance elements:
Embed stewardship and escalation
Engagement is not a substitute for criteria. Define escalation steps and consequences when targets are missed.
Build disclosure coherence from day one
Ensure a single narrative and a single KPI definition set across website, pre contractual and periodic reporting, with an audit ready evidence trail.
What SFDR Participants Should Start Now
Ensure access to capital
Check your investors’ appetite for the new categories, particularly Transition.
Re-map products early
Assess which existing products could credibly qualify as ESG Basics, Transition or Sustainable – and where a re design or re positioning is more realistic than forcing a label.
Run a naming and claims audit
Inventory all sustainability terms used across fund names, factsheets, pitch decks and websites; test them against binding criteria and portfolio reality.
Strengthen governance and controls
Clarify ownership, monitoring routines and breach handling. Evidence based governance reduces both supervisory friction and reputational risk.
Earliest SFDR2.0 Milestones
How Karteria Partners can help
While the likely implementation seems to be far in the future, we recommend preparing for it now. Karteria Partners provides senior expert, practical support to start our transition to SFDR 2.0 implementation investable and practical – we call it our “MOT“ (or TÜV for those who prefer) for your investment vehicle!
Want to find out more? Contact us - we are happy to discuss your best way forward with you.
References
Comments