JUNE 2025
Climate Neutrality by 2050
As part of the European Green Deal, the European Union aims to become the world’s first climate-neutral continent by 2050. To achieve this goal and combat climate change, the European regulator seeks to redirect capital toward responsible and sustainable investments through the Sustainable Finance Disclosure Regulation (SFDR). As emphasized in its preamble, “urgent action is needed to mobilize capital not only through public policies but also by the financial services sector.”
The regulation applies to all European financial market participants and financial advisors, including investment firms, pension providers, and insurance-based investors, as well as to qualifying venture capital and social entrepreneurship activities, and to EU-based securities funds and other portfolio-type financial products. It imposes disclosure obligations at both the entity level—covering institutions’ policies on sustainability risks and the adverse sustainability impacts of their investment activities—and the product level, requiring reporting on the degree of sustainability of each specific financial product.
Although the SFDR is designed as a disclosure regime aimed at enhancing market transparency and combating greenwashing—and does not mandate sustainable investments per se—numerous studies have shown that it has nevertheless driven a significant shift in investor behaviour, resulting in increased capital inflows into financial products with higher sustainability ambition. For instance, Becker, Martin, and Walter analyzed the effect of the new SFDR sustainability labels on mutual funds and individual investors in the EU, finding that the regulation influenced ESG fund scores and fund net inflows. Similarly, Martinez-Meyers, Ferrero-Ferrero, and Muñoz-Torres evaluated the impact of SFDR on ESG performance and risk in the fund industry from a multi-regional perspective, providing evidence of a clear reduction in ESG risk and an improvement in ESG performance across all samples following the regulation.
TRENDS
Under SFDR, investment products are categorized into three levels of sustainability ambition:
01
“Brown” or “Grey”: Products that do not integrate sustainability considerations into their investment process (or only to a minimal degree).
02
"Light Green": Products that promote environmental or social characteristics.
03
"Dark Green": Products with a sustainable investment objective.
Since SFDR’s adoption, Article 8 funds have surged in popularity. In Morningstar’s first SFDR report for Q1 2021, only 18% of EU-domiciled funds were classified as Article 8, with a mere 3.6% as Article 9. The majority of funds at the time remained unclassified or fell under Article 6. Fast forward to the present day, and the landscape has shifted markedly: according to Morningstar’s report for Q1 2025, there are now 11,774 Article 8 funds, making up 46.9% of the EU fund universe. Article 9 funds remain a small segment at 4.2%, while Article 6 funds still constitute the largest category, with 48.9% of funds not making any sustainability claims. This evolution reflects both the popularity and ambiguity of the Article 8 label, which has become the de facto choice for funds seeking to align with ESG trends without being bound by Article 9’s stricter requirements. In practice, we clearly observe this trend: most clients setting up new products now do so under Article 8.
This trend is also driven by growing consumer demand for responsible and sustainable financial products. In practice, some firms not offering any funds in the meaning of Article 8 or 9 SFDR, reference sustainability or “sustainable investments” on their websites—a practice that has triggered regulatory findings in audits. This highlights the reputational and compliance risks of marketing-driven sustainability statements that are not backed by appropriate disclosures or fund structures.
FUNDS' NAMES
The classification of funds into Article 6, 8, or 9 categories, combined with the fund’s name, has become a powerful signalling mechanism for investors. In particular, the presence of ESG-related words in fund names serves as a key communication tool, conveying a product’s strategy and sustainability focus. Reflecting this trend, there has been a significant increase in the use of ESG-related terms in fund names, which have become important marketing and signalling devices in the retail investment space. Since 2022, the use of general “ESG” terms has surged sharply, and by early 2023, nearly 14% of EU funds included such words in their names—substantially more than those using specifically environmental (“E”) or social (“S”) terms. This growth mirrors rising investor demand and intensified marketing efforts around ESG branding across the industry, as evidenced by Refinitiv Lipper's data on ESG fund flows and performance, and the European Securities and Markets Authority's (ESMA) findings on the increased use of ESG-related language in EU fund names and documentation. To address concerns that fund names may mislead investors, the ESMA has issued final guidelines highlighting the critical role of fund names in shaping investor perceptions.
As ESMA explains in its Guidelines on Funds’ Names Using ESG or Sustainability-Related Terms: “A fund’s name is often the first piece of fund information investors see and, while investors should go beyond the name itself and look closely at a fund’s underlying disclosures, a fund’s name can have a significant impact on their investment decisions”.
The guidelines set minimum thresholds for the use of certain terms in fund names:
01
“To use the term “sustainable”, at least 50% of investments must meet SFDR’s definition of sustainable investment (Article 2(17)).
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Terms like “transition” or “impact” require a commitment to measurable sustainability outcomes.
03
Words such as “ESG”, “green”, or “social” may only be used if the fund promotes environmental or social characteristics with binding criteria integrated into the investment process.
These rules became formally applicable across all EU member states from early 2025. However, national competent authorities (NCAs) retain the option to opt out of applying them, which may result in regulatory fragmentation and varying standards across jurisdictions.
Despite its goal of enhancing transparency and comparability, the SFDR framework reveals notable conceptual limitations, particularly in its accessibility to retail investors. Key concepts such as “sustainable investment”, “promotion of environmental or social characteristics”, or “consideration” of principal adverse impacts (PAIs) remain subject to interpretation. As a result, products disclosing under Article 8 cover a wide spectrum of strategies—from those applying a single exclusion criterion to those almost entirely focused on sustainable activities—creating challenges for consistent understanding and effective comparison across products.
Articles 4 and 7 of the SFDR mandate disclosures regarding the consideration of principal adverse impacts on sustainability factors. However, the regulation lacks clarity on the practical application of “consideration”, leading to varied interpretations among financial market participants. In practice we saw a firm repurposing its existing sustainability risk management policies to address principal adverse impacts, effectively equating the two concepts and thereby obscuring the distinction between risk management and the mitigation of adverse impacts. This instance raises a critical question: if even professional asset managers struggle to navigate the complexities of the SFDR, how can retail investors be expected to do so?
In its Briefing on EC Targeted Consultation Regarding SFDR Implementation, the Platform on Sustainable Finance highlights several structural gaps in the SFDR framework that contribute to its limited user-friendliness, particularly for retail investors. These include the misalignment between a product’s name, its sustainability marketing claims, declared sustainability contributions, and its actual investment strategy; the need for sustainability performance reporting to cover the entire product rather than just a portion; and the absence of minimum criteria for defining sustainable investments. To address this, it recommends in its Briefing Paper on Product Categorisation and the Sustainable Finance Disclosure Regulation strengthening and aligning the definition of sustainable investment and the “do no significant harm” (DNSH) test in Art. 2(17) SFDR with the EU Taxonomy, which provides clear, activity-based criteria. Unlike the broader legal definition of sustainable investments allowing diverse interpretations by financial market participants, the Taxonomy sets strict, science-based thresholds and should exclusively govern environmentally sustainable investments for eligible or significantly harmful activities with greener alternatives. The financial market participants should only apply the definition of sustainable investments beyond the Taxonomy for activities not yet covered. Furthermore, entity-level improvements like GHG reductions or social factors should be classified under a transition category if supported by credible plans, rather than under sustainable investments.
PLATFORM
One of the central measures to address these challenges, the Platform on Sustainable Finance recommends a new product categorization based on clear sustainability strategies, including:
01
Investments contributing through Taxonomy-aligned investments or sustainable investments without significant harmful activities, aligned with a precise EU Taxonomy definition.
02
Investments supporting the shift to a net-zero and sustainable economy by avoiding carbon lock-ins and following the European Commission’s guidance on facilitating finance for the transition.
03
Investments that exclude significantly harmful activities and invest in assets that meet improved environmental or social criteria or apply various sustainability features.
Products not fitting these categories would be classified as unclassified. The Platform further advocates for consistent disclosure of principal adverse impacts across all investments in a product and the introduction of clear minimum criteria and key performance indicators (KPIs) to enhance comparability, transparency, and investor trust.
SFDR has played a pivotal role in reshaping the European investment landscape, fostering greater transparency and encouraging the flow of capital toward more sustainable assets. However, its impact is constrained by conceptual vagueness and inconsistent implementation, particularly when it comes to retail investor understanding. We therefore welcome the proposals put forward by the Platform on Sustainable Finance, including the introduction of clearer definitions, tighter fund naming rules, and harmonized disclosure requirements. Aligning the SFDR more closely with the EU Taxonomy is essential to achieving its full potential—ensuring that sustainable finance lives up to its name and builds lasting investor trust.
Kyiv Consulting offers expert support in SFDR implementation in the EU. Get in touch with our team for a tailored consultation.
Get in touch with our team for a tailored consultation.
Kateryna Sergeeva is a certified Sustainable Finance Professional (VÖB) with 3 years of experience in auditing of banks, investment firms, insurance companies and credit institutions according to the Sustainable Finance Disclosure Regulation (SFDR) and advising on the implementation of CSRD requirements.
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