REPORT: 40% of Article 9 funds will no longer qualify as 'sustainable' under incoming EU rules

More than 40% of the funds currently carrying the EU's top sustainability label are at risk of losing it.

That's the headline finding from new analysis by New York-headquartered ESG research firm Clarity AI.

The report, published today, assessed more than 21,100 European investment funds against the proposed exclusion rules under SFDR 2.0 – the incoming overhaul of the bloc's sustainable finance labelling regime.

Massive compliance risk

Around 40% of Article 9 funds – the darkest-green tier under the SFDR – would fail to qualify as "Sustainable" under the proposed new framework. For Article 8 funds, the so-called light-green category, the failure rate jumps to roughly 80%.

“SFDR 2.0 reflects a broader shift toward more robust and comparable sustainability labels in Europe," said Pablo Díaz-Varela, ESG risk director at Clarity AI in a press statement.

The two biggest drivers of non-compliance are exposure to fossil fuel companies – coal, oil, and gas – and holdings in companies found to be in breach of the UN Global Compact or OECD guidelines for multinational enterprises, a set of internationally recognised standards covering labour rights, corruption, and environmental conduct. Tobacco exposure and controversial weapons make up the remainder.

"The focus will increasingly move from how funds are described to what is actually held in portfolios," said Díaz-Varela. "Ensuring that the two are aligned will be key to maintaining investor trust.”

What's changing under SFDR 2.0

The European Commission published its SFDR 2.0 proposal in November 2025. Out go the old Article 8 and Article 9 labels, replaced by three new categories: Transition, ESG Basics, and Sustainable.

Each comes with hard minimum standards – including mandatory portfolio exclusions based on a benchmark criteria aligned with the Paris agreement. That departs from the current SFDR rules, where companies are largely allowed to self-certify – a fact that some critics say has allowed companies to greenwash.

The new rules will also require at least 70% of a fund's assets to actively contribute to the stated sustainability objective. Funds that don't qualify for any of the three labels will be barred from using ESG or sustainability-related terms in their names and marketing materials.

A market-wide reckoning

The scale of potential non-compliance points to a structural gap between how funds have been labelled and what they actually hold.

Even among Article 9 funds, fewer than 70% meet the proposed exclusion bar for the mid-tier ESG Basics label, the report found.

SFDR 2.0 is still working its way through the EU legislative process. The European Parliament and Council are expected to finalise their positions by mid-2026, opening the door to negotiations. A political agreement is pencilled in for 2027, with the regulation unlikely to come into force before 2028.

That timeline may feel distant, but Clarity AI warns against complacency.

"Although the regulation is unlikely to apply before 2028," the report notes, "its strategic implications are immediate."

For fund managers who built their sustainability credentials on the current self-labelling system, that clock is already ticking.