SFDR is entering a phase where labels may matter more than disclosures. The proposed SFDR 2.0 framework, with clearer product categories and tighter eligibility rules, would not simply rename today’s Article 8 and Article 9 universe. It would shrink it, reshape it, and likely accelerate a trend that is already visible in the data: light green funds are absorbing most sustainability branded flows, while dark green funds continue to see persistent redemptions.

In 2025, investors were not broadly rejecting sustainability as a concept. They were reallocating toward products that feel easier to justify in portfolios, easier to distribute, and less exposed to regulatory uncertainty. SFDR 2.0 could formalise that behaviour, even if it is not the original intent.

What the 2025 Flow Data Says About Investor Behaviour

The strongest signal in the numbers is the divergence between Article 8 and Article 9 demand.

In the fourth quarter of 2025, Article 8 funds attracted about EUR 72 billion of net new money, led primarily by fixed income strategies. Over the same period, Article 9 funds recorded outflows of around EUR 7.2 billion, extending their streak of redemptions to a ninth consecutive quarter.

Looking across the full year, Article 8 funds gathered about EUR 257 billion, which represented roughly 38% of total EU fund flows. Article 9 funds ended the year with net withdrawals of about EUR 23 billion. This is not a short-term wobble. It is a sustained pattern.

A key driver is that Article 8 has become the flexible “default” sustainability label in Europe. It lets managers run broadly diversified strategies while incorporating ESG constraints, ratings, or tilts. Article 9, by contrast, is treated by many allocators as a higher burden label that must survive deeper scrutiny on holdings, exclusions, and measurable impact, particularly after several years of heightened concern about greenwashing.

Why Light Green Bond Funds Keep Winning the Allocation Battle

The composition of inflows matters. In Q4 2025, almost EUR 53 billion of Article 8 subscriptions came from fixed income, and investors leaned more into investment-grade credit relative to prior quarters.

That preference fits the macro backdrop. In a volatile environment with shifting rate expectations, bond funds with higher average credit quality, longer duration, and competitive yields can attract flows even without an ESG label. The label, however, becomes an added comfort factor for institutions that must demonstrate responsible investment intent without taking concentrated thematic risk.

In equities, the picture was more mixed. Article 8 equity funds still attracted inflows, but at a smaller scale than fixed income, and performance and regional allocations played a larger role in explaining where money went.

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A Market in Which “Dark Green” Is Not Being Paid For

Article 9 flows continuing to be negative even as broader markets recovered tells you something structural: many investors are no longer treating the darkest sustainability label as a must own category.

Some of that is reputation risk. Some is that Article 9 portfolios can be narrower, more growth tilted, and more sensitive to sector exclusions. Some is distribution friction, as asset managers and platforms become more cautious in how they position products to avoid regulatory challenge. And some is simply fatigue, because the label has not consistently delivered the one thing many allocators still prioritise above all else: predictable performance outcomes.

What SFDR 2.0 Changes in Practice

The proposed reform shifts SFDR from a disclosure oriented regime toward a categorisation regime with clearer entry requirements. Instead of the current Article 6, 8, and 9 structure, the Commission’s direction introduces three categories with exclusion and qualifying criteria.

Transition would sit under Article 7. ESG Basics would sit under Article 8. Sustainable would sit under Article 9.

If these categories had applied in 2025, simulated results suggest that Article 6 would have captured a larger share of total EU fund flows. The Article 8 share would have been smaller, and Article 9 would still have remained in negative territory. Transition would not have shown net new money for the year.

This is important because it implies the framework does not automatically solve the flow problem for sustainable funds. It mostly changes which funds qualify, and how much of the market can credibly carry a sustainability label.

The Likely Near-Term Outcome: A Smaller Labelled Universe

Under plausible assumptions, the sustainability related universe could meaningfully contract. Article 6 would dominate a larger share of assets than it does today, while the new ESG Basics bucket would shrink relative to today’s Article 8 population. Transition would likely remain a niche segment, and Sustainable might grow in asset share but still be small.

This is not necessarily negative. A smaller labelled universe can mean a clearer one. But it also means reclassification risk, communication work, and potential disruption in distribution pipelines.

Where Regulators Still Need to Decide the Rules of the Game

The proposal still leaves several operational and commercial questions unresolved, and these are not minor details. They will determine which strategies can realistically qualify.

One open issue is the final naming and definition of the new Article 8 bucket. “ESG Basics” may read clearly to professionals but can be confusing or unappealing in retail contexts. Another is what ESG “outperformance” means and whether it is tested security by security or at portfolio level.

The 70% alignment threshold is another pivotal design choice. If assessed at asset level, it creates heavier data dependencies and compliance complexity, especially for fixed income and multi-asset strategies. If assessed at portfolio level, it becomes more workable but may feel less strict to supervisors.

Exclusions add more friction. A strict coal revenue threshold, for example, sounds simple in concept but can become difficult in practice when underlying issuer data is incomplete or inconsistent across providers.

Sovereign debt treatment is also unresolved. Excluding general-purpose sovereign bonds from the 70% calculation for some categories could unintentionally reduce the role of public sector financing in transition and sustainability portfolios. It could also distort how asset managers build diversified allocations.

Finally, categorising Paris-aligned strategies is not straightforward. They often meet stringent fossil fuel rules, which suggests they belong in a Sustainable bucket, yet they also follow explicit decarbonisation pathways, which suggests Transition. How regulators decide this will influence a large segment of the European index and ETF ecosystem.

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Why Fund Flows May Not “Come Back” Even With Cleaner Labels

Even if SFDR 2.0 creates more confidence in the integrity of labels, the flow picture can remain challenging for the strictest category.

Investor caution in 2025 was driven by geopolitics, tariffs, and macro uncertainty. On top of that, sustainability strategies faced additional uncertainty from regulatory delays and rollbacks across major markets. Cleaner labels reduce one layer of risk, but they do not remove market risk, performance dispersion, or the practical reality that many allocators will prefer broad exposure that does not force them into narrow sector tilts.

That is why the core message of the 2025 data is likely to remain relevant under SFDR 2.0: demand concentrates where products are flexible, defensible, and easy to implement at scale.

What Asset Managers and Distributors Should Watch Next

The next phase will be shaped by Level 2 details and delegated acts. Even before final rules land, managers will start scenario planning because reclassification affects product design, names, factsheets, client reporting, and MiFID suitability mapping.

The managers best positioned will be those who can do three things well. They can explain clearly why a fund belongs in a category. They can evidence the classification with robust data and repeatable processes. And they can keep the product investable, meaning diversified enough to meet portfolio roles while still complying with stricter sustainability definitions.

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