From light green to ESG Basics: why existing funds with sustainability characteristics will not automatically qualify for the new product category

Article 8 will remain under SFDR 2.0, but with a new name and fundamentally different requirements. Fund managers who want to offer their products under the new ESG Basics category will need to reassess them thoroughly.

Status of the proposal

The European Commission published its proposal for SFDR 2.0 on 20 November 2025. This article discusses the Commission’s proposal. It is not yet law, and the text may still change.

Under the current SFDR, fund managers have considerable freedom to decide how ambitious their Article 8 products should be. Provided they are transparent about their choices, they comply with the Regulation. This would change under SFDR 2.0. Article 8, often referred to as ‘light green’, would be renamed ‘ESG Basics’ and would have fixed statutory eligibility criteria.

Article 8 SFDR today: a disclosure category

The current SFDR divides financial products into three categories: Article 6 (products without a sustainability ambition), Article 8 (products that promote environmental or social characteristics) and Article 9 (products with a sustainable investment objective). Article 8 is primarily a disclosure requirement. The Regulation does not prescribe how sustainable an Article 8 product must be. The manager decides:

• which environmental or social characteristics the product promotes;
• what proportion of the portfolio must meet those characteristics;
• which sustainability indicators and methodology are used; and
• which exclusions, if any, apply.

Once the manager has established these choices and communicated them to existing and prospective investors, they are binding and must be followed. The SFDR itself, however, does not impose a minimum level of sustainability ambition. A fund that uses just 10% of its portfolio to attain the promoted sustainability characteristics can formally fall under Article 8 SFDR, as can a fund that sets an 80% threshold. The SFDR does not prescribe a minimum percentage for Article 8 products. This does not mean, however, that a fund with a limited sustainability component can freely present itself as strongly sustainable. Under the rules against greenwashing, a sustainability claim must be credible and proportionate to the actual investment strategy. For funds that use ESG or sustainability terms in their names, the ESMA guidelines therefore require at least 80% of investments to be used to attain the promoted environmental or social characteristics or sustainable investment objectives.

The SFDR does not itself provide for automatic reclassification or a specific sanction if a self-imposed binding commitment is not met. The manager must, however, report periodically on the extent to which the promoted characteristics or sustainable investment objective have been attained. If a binding commitment is involved, the manager must assess what measures are needed to meet it. A deviation may also have consequences if it makes the product information or marketing misleading. This broad framework is a key criticism raised by supervisors and the European Commission: classification as an Article 8 product says little in itself about its actual sustainability ambition and is expressly not a sustainability label.

ESG Basics under SFDR 2.0: a product category with specific eligibility criteria

The Commission’s proposal would turn Article 8 into a product category with requirements that a product must meet to use the ESG Basics designation. The main proposed requirements are as follows.

1. The 70% threshold

At least 70% of the product’s investments must demonstrably integrate sustainability factors in accordance with its binding investment strategy. The manager must show that this threshold is met, measured using appropriate sustainability indicators.

Investments counted towards the 70% threshold must fall within one of the approaches recognised by the proposal:

• an ESG rating that is better than the average for the investment universe or reference benchmark;
• performance that is better than the investment universe or benchmark on specific sustainability indicators;
• investments in companies or activities with a demonstrably positive sustainability track record;
• a combination of the investments above with investments that meet the criteria for the sustainable category (Article 9) or the transition category (Article 7); or
• another substantiated method that goes beyond merely managing sustainability risks.

2. Minimum exclusions across the entire portfolio

Minimum exclusions would apply to the entire portfolio of an ESG Basics product, including the remaining 30% that does not count towards the 70% threshold. These include, among other things, controversial weapons, tobacco, serious breaches of the UN Global Compact principles or the OECD Guidelines for Multinational Enterprises, and certain coal-related activities.

3. Substantiate the approach in advance and report on it annually

Under the current SFDR, managers must already explain in pre-contractual and website disclosures which sustainability characteristics a fund promotes, which strategy, indicators, methodologies and data sources it uses, and how investments are allocated across the portfolio. They must then report annually on the extent to which the promoted characteristics have been attained.

What is new is that this information must demonstrate that the fund meets the uniform conditions for the ESG Basics category. The manager must describe how at least 70% of investments are selected under the binding ESG strategy, which of the five statutory approaches are applied individually or in combination, and what proportion qualifies under each approach. The manager must also explain how investments that underperform against the chosen indicators are handled. The annual report must then account for the extent to which ESG factors were actually integrated in line with this strategy. The existing disclosure and reporting obligations would therefore largely remain, but would be linked to a fixed 70% minimum and a more standardised assessment framework.

Practical example: the Global ESG Equity Fund

An example makes the difference more concrete. Suppose a manager wants to launch a new global equity fund called the ‘Global ESG Equity Fund’. The manager positions it as an Article 8 product under the current SFDR and intends it to fall within the ESG Basics category under the future framework.

Under the current SFDR

The manager classifies the fund under Article 8 SFDR by promoting, for example, climate change mitigation as an environmental characteristic and good working conditions as a social characteristic. These characteristics are made binding in the investment strategy, for example by targeting the portfolio’s CO₂ intensity and excluding companies involved in serious labour or human rights violations.

Because the fund uses ‘ESG’ in its name, the manager cannot decide entirely independently what minimum proportion of investments must contribute to these characteristics. Under the ESMA guidelines on fund names using ESG or sustainability-related terms, at least 80% of investments must be used to attain the promoted environmental or social characteristics. Because ‘ESG’ is treated as an ‘environmental’ term, the exclusions for EU Paris-aligned Benchmarks also apply.

Under ESG Basics

For the ‘Global ESG Equity Fund’, the move to ESG Basics may be less demanding than for Article 8 funds to which the ESMA fund-naming guidelines do not apply. Because the fund’s name contains ‘ESG’, it must already meet the 80% threshold and the exclusions for Paris-aligned Benchmarks under those guidelines. That does not, however, mean it would automatically qualify as an ESG Basics product. The current 80% threshold concerns investments used to attain the environmental or social characteristics defined by the manager. Under the Commission’s proposal, at least 70% of investments must also fall within one or more of the five legally defined types of eligible investment.

The manager must demonstrate that at least 70% of investments integrate sustainability factors in line with the binding strategy. For this fund, the strategy could, for example, target lower CO₂ intensity and demonstrably good performance on labour and human rights. The manager would need to:

• determine which investments qualify for the 70% threshold and on which statutory approach this is based;
• explain which approaches are used and what proportion qualifies under each;
• establish appropriate indicators and data sources;
• apply the prescribed exclusions and explain how underperforming investments are handled; and
• update the product documentation, website and marketing accordingly, and report annually on implementation.

Fund managers would be well advised to examine now how closely their Article 8 funds align with the proposed ESG Basics criteria. They can start by identifying qualifying investments, available ESG data and the documentation that needs to change. The most significant change is therefore not the minimum percentage itself, but the substantive assessment of which investments may count towards it. As long as the ESMA guidelines remain in force, the fund must also take account of the higher 80% threshold and the broader Paris-aligned Benchmark exclusions because of its name. The existing ESMA guidelines provide a useful starting point, but the manager must also assess the portfolio and investment strategy against the specific ESG Basics criteria.

Start preparing in good time

Fund managers would be well advised to assess their existing Article 8 funds against the proposed ESG Basics criteria now. Moving to ESG Basics will involve more than changing a few lines of text. Fund managers will need to revisit their investment strategies, data and documentation to demonstrate that they meet the new requirements. Starting early will help avoid last-minute changes to existing funds and allow for a phased, controlled transition.

Do you have questions about the proposal or want to know what SFDR 2.0 would mean for your funds?

Projective Group helps financial institutions translate new laws and regulations into workable processes and demonstrable compliance. Together, we can assess the impact of SFDR 2.0 on your funds and support you with implementation, so you are ready to meet the new requirements in time.