New analysis from fund data provider Morningstar found that new green fund categories proposed under a revised Sustainable Finance Disclosure Regulation (SFDR) would have captured significantly limited capital if the regime had been operational during 2025.
The report indicates that the new framework would have driven a shift toward ‘Article 6’ funds, which do not have to incorporate environmental or social considerations. Had the rules applied in 2025, the share of Article 6 funds in total EU flows would have reached 72%, compared to the 66% under existing rules. The proposed ‘ESG Basics’ (Article 8) category would have captured only 30% of annual flows, a drop from the actual 38% seen last year.
Under the new definitions, the ‘Sustainable’ (Article 9) category would have remained in net redemption, with outflows equivalent to 2% of total assets. The ‘Transition’ (Article 7) category — designed to support the shift to a green economy — would have attracted no net new money in 2025 “as inflows in the second half of 2025 failed to offset outflows recorded in the first half”.
Existing Article 8 funds attracted €72 billion of net new money in Q4 2025, driven by fixed income strategies, representing a slight fall from the €79 billion of inflows captured the previous quarter.
Morningstar said the new SFDR 2.0 framework required several clarifications to provide improved guidance to investors. These include defining the precise criteria for the ‘ESG Basics’ label and providing technical rules on assessing the 70% alignment threshold for Article 7 and 9 funds. The treatment of general-purpose sovereign bonds and the formal integration of Paris-aligned benchmarks also remain key areas of regulatory ambiguity.
Additionally, said Morningstar, specific exclusion rules must be formalised to prevent inconsistent labeling across the market.
“There is a strong need for pragmatic, investable criteria that can be communicated simply and consistently to end‑investors. Alignment with other regulatory frameworks, particularly MiFID II, is essential to avoid fragmentation in distribution and suitability processes,” said the report authors, which included Morningstar Head of Sustainable Investing Research Hortense Bioy.
The proposals were published last November by the commission and are now subject to negotiation in the European Parliament and Council. This will be followed by the drafting of technical standards by the European Supervisory Authorities, expected early next year.
