The era of claiming impact without evidence is coming to an end. SFDR reform would require investors to show their workings.

For years, investment funds have been able to call themselves ‘sustainable’ or ‘impact-focused’ under rules that required them to disclose their approach, but set few common criteria for what qualified. Labels like Article 8 and Article 9, introduced under the EU’s Sustainable Finance Disclosure Regulation, known as the SFDR, were designed to help investors understand what a fund was trying to do. In practice, they became something closer to marketing tools.

Article 8 funds were supposed to promote environmental or social characteristics. Article 9 funds were supposed to have sustainable investment as their objective. The regulation did impose requirements, including detailed pre-contractual and periodic disclosures and, for Article 9 funds, a ‘do no significant harm’ test. But key concepts were left open to interpretation, and the regime set no minimum criteria for using either label. Thousands of funds claimed these labels, and no two interpreted them in quite the same way.

Regulators noticed. In November 2025, the European Commission proposed a significant reform of the SFDR, which would replace the Article 8 and Article 9 system with three new categories and introduce much clearer requirements for what a fund has to show in order to use a sustainability or impact label at all.

What changes are proposed?

The proposal replaces Articles 8 and 9 with three categories – Sustainable, Transition and ESG Basics – each with defined criteria and limits on the use of sustainability terms in fund names.

ESG Basics would be the broadest of the three. It would cover funds that integrate sustainability factors into their investment strategy beyond merely managing sustainability risks – for example, by favouring issuers with stronger ESG ratings or a demonstrated positive sustainability record – without committing to a formal transition plan or a quantified sustainability objective. Like the Transition and Sustainable categories, it would require at least 70% of investments to align with the category’s criteria. What is less demanding is the qualifying criteria and the exclusions, not the threshold itself. See our previous blog on SFDR reform for more information about the detail of the proposal: SFDR 2.0: Europe’s sustainable finance reset.

For impact investors, one element matters most: the proposal reserves the term ‘impact’ for Sustainable and Transition products that have, as their objective, the generation of a pre-defined, positive and measurable environmental or social impact. ESG Basics products cannot use it. Sustainable and Transition products would need to set out an impact theory explaining how intended outcomes will be achieved, and report on realised impact, including how their investments and investors’ capital contribute to it. However, they are not required to prove strict causal additionality – meaning that they do not have to demonstrate that positive outcomes would not have occurred otherwise. Funds that meet no category would be treated as non-categorised and prohibited from using terms like ‘sustainable’, ‘ESG’ or ‘impact’ in their names and marketing materials.

SFDR 2.0 is still a draft regulation, not law. Co-legislators are now negotiating the final text in trilogue, which was due to start on 22 October 2026, with political agreement targeted for late 2026 or early-mid 2027, and application not expected before 2029. The direction is clear; the exact detail may yet change.

Why does it matter for impact investors?

The shift moves the burden of proof. The current system asks funds to disclose. The proposed system asks funds to demonstrate. That distinction, between describing intent and showing evidence, runs through everything the impact investing field is grappling with right now.

The Global Impact Investing Network (GIIN) now estimates global impact-investing under management at USD $1.76 trillion. Growth has slowed, from a compound annual rate of 21% between 2019 and 2024, to around 6% between 2024 and 2026, which GIIN describes as a market becoming more selective about where capital goes. This is a field that has grown fast on a combination of genuine conviction and, in some cases, loosely defined claims. Reform changes the terms on which that capital operates.

At the same time, clean energy, food systems and domestic infrastructure, long-standing themes in impact portfolios, are now being backed by governments for reasons of national security as much as sustainability. That creates momentum, but also risk: when impact priorities become political priorities, they gain backing but also become exposed to political cycles. An impact case built primarily on policy alignment is only as durable as the policy itself. The experience in parts of the United States, where ESG considerations have faced significant political challenge, illustrates this clearly. Legislatures in more than 20 states, including Texas and Florida, have enacted or proposed anti-ESG laws, and since 2021 states have passed 118 anti-ESG measures against 37 supportive ones. These laws typically bar state entities from contracting with, or investing public pension assets with, financial firms deemed to boycott fossil fuels, and some prohibit public issuers from issuing ESG-labelled municipal bonds. The pressure is real but uneven: only 14 ESG-related state bills became law in 2026, and courts have struck down several statutes, including Texas SB 13, whose injunction has since been stayed on appeal. This transatlantic divergence underscores why Europe’s regulatory pivot is so critical: as the US market fragments along political lines, the EU is doubling down on a standardised, evidence-led framework that attempts to take the politics out of impact validation

What will be difficult to demonstrate in practice?

Measurement has improved, particularly on the environmental side. Frameworks such as IRIS+ have helped establish a shared language across the field. But the harder problem remains attribution, or causal additionality: not just what happened, but whether the investment caused it. Determining whether capital genuinely contributed to an outcome, rather than simply being present when it occurred, requires understanding what would have happened in its absence. In markets where baseline data is limited and reporting systems are uneven, it is harder still.

One issue receives less attention than it should: where the capital goes. Without deliberate direction, it follows the path of least resistance – towards developed markets and lower-risk contexts. Many of the regions facing the most acute climate and development challenges, across sub-Saharan Africa, South and South-East Asia, and parts of Latin America, remain systematically undercapitalised. SFDR reform gives investors a clearer framework for directing capital towards them. Whether they choose to is another matter.

How TDi can help

TDi works with financial institutions, asset managers and development finance institutions on the practical dimensions of sustainable finance. As regulatory expectations tighten, that work centres on whether impact strategies have clearly defined objectives, whether those objectives can be measured credibly, and whether the evidence is strong enough to support the claims being made.

We can support you with:

• ESG and impact investment framework development, aligned with the proposed SFDR categories
• Regulation and standards mapping using TDi’s Standards and Regulations Tool – part of the TDi Digital Platform
• Impact measurement and attribution methodology for listed equity, private markets and frontier market contexts
• ESG risk assessment for investment portfolios, including supply chain and critical minerals exposure

If you are reviewing your sustainable investment strategy ahead of the proposed SFDR changes, we would be glad to discuss this with you. Please get in touch for a free consultation or explore some of our finance and investment solutions here.

References

1. Sustainable Finance Disclosure Regulation
2. European Commission proposal for significant reform of SFDR
3. The Global Impact Investing Network (GIIN): Sizing the Impact Investing Market 2024
4. The Global Impact Investing Network (GIIN): State and size of the impact investing market 2026 – data, decisions and future directions. October 2026.
5. The EU Law tracker
6. Ballotpedia, “States enact 14 ESG-related bills in 2026”
7. Florida Statutes §215.681
8. Latham & Watkins on Texas SB 13 (2026):
   •  This article covers how on February 4, 2026, US District Judge Alan Albright held SB 13 unconstitutional.
   • This article covers how on May 29, 2026, the Fifth Circuit granted Texas’s motion to stay the injunction blocking enforcement of SB 13.
9. A&O Shearman – article, October 2026: SFDR 2.0 – the overhaul takes shape
10. Weil – article, October 2026: SFDR 2.0 – State of Play