Article 9 of SFDR applies to financial products that have sustainable investment as their objective. These are the highest-ambition products in the SFDR classification system, and they face correspondingly more demanding disclosure obligations.
In plain English: an Article 9 fund is not just trying to avoid bad ESG companies, every investment must, in principle, qualify as a genuine sustainable investment. The whole fund is designed around a sustainability goal, not just filtered for sustainability.
Every investment in an Article 9 product must, in principle, qualify as a sustainable investment, or be explained as an exception.
The Article 9 Definition
Article 9(1) of SFDR defines an Article 9 product as a financial product where sustainable investment is the objective and a designated index has been designated as a reference benchmark. Article 9(2) covers products where sustainable investment is the objective but no benchmark index has been designated, in which case the product must explain how the sustainable investment objective is consistent with the information disclosed.
Article 9(3) covers financial products that have a reduction in carbon emissions as their objective, specifically, products that track EU Climate Transition Benchmarks (CTBs) or EU Paris-aligned Benchmarks (PABs) as defined under the EU Benchmarks Regulation.
The key distinction from Article 8: an Article 8 product promotes environmental or social characteristics; an Article 9 product has sustainable investment as its objective. This is a higher bar, the product's primary purpose is to achieve sustainable investment outcomes, not merely to favour investments with positive E/S characteristics. In practice, this means Article 9 products should be making sustainable investments (as defined in Article 2(17)) across their entire portfolio (or as close to 100% as their structure allows), with limited exceptions.
What makes a fund Article 9 in practice:
Consider two funds from the same manager:
Fund A (Article 8): Excludes the worst 20% ESG-rated companies in each sector and tilts toward companies with strong emissions reduction targets. The manager promotes low-carbon characteristics but the fund can still invest in a wide range of companies, including those that are "transitioning."
Fund B (Article 9): Invests only in companies that meet a three-part test, they contribute to climate change mitigation (verified science-based targets), do not cause significant harm to any other environmental or social objective (DNSH assessed via PAI indicators), and have sound governance. 95% of the portfolio must qualify as sustainable investments. The remaining 5% is cash or hedging instruments.
Fund B is Article 9 because the sustainable investment objective drives every investment decision, not just the screening process.
The "Do No Significant Harm" (DNSH) Principle
Article 9(1) and (2) require that Article 9 products apply the DNSH principle to all sustainable investments they hold. This means that for each investment claimed as a sustainable investment:
- The investment contributes to an environmental or social objective
- The investment does not significantly harm any environmental or social objective
- The investee company follows good governance practices
The DNSH assessment is one of the most technically demanding aspects of Article 9 compliance. For environmental investments, the DNSH criteria are aligned with the EU Taxonomy Regulation's technical screening criteria. For social investments, firms must develop their own methodology (since social DNSH criteria are not yet specified in EU Taxonomy Regulation).
The RTS requires Article 9 products to disclose the indicators used to measure DNSH, typically a set of PAI indicators that serve as the DNSH measurement mechanism. If no investment causes significant harm on any of these indicators, the DNSH principle is satisfied.
Reference Benchmark Requirement
Where an Article 9 product uses a designated index as a reference benchmark:
- The benchmark must be a Paris-aligned Benchmark (PAB) or EU Climate Transition Benchmark (CTB) for products targeting reduction in carbon emissions (Article 9(3))
- For other Article 9 products, the benchmark must be specifically designed to attain the sustainable investment objective, and must differ from a broad market index
The RTS requires that Article 9 products with a reference benchmark explain:
- How the index is aligned with the sustainable investment objective
- Why the index differs from a broad market index
- How the product's investment strategy continuously ensures alignment with the index
For Article 9 products tracking PABs or CTBs specifically, the RTS notes that such products are "deemed to make sustainable investments", they benefit from a presumption that investments in index constituents qualify as sustainable, given that PABs and CTBs have their own stringent sustainability criteria under the Benchmarks Regulation.
A PAB/CTB-tracking Article 9 product is like a restaurant certified by an independent third party as meeting strict sustainability standards, the certification does the heavy lifting on substantiation. An Article 9 product without such a benchmark must build its own case for why each investment qualifies as sustainable, more like a self-certified restaurant that must document its sourcing, waste management, and energy use for every inspector's visit.
"No Benchmark" Article 9 Products
Article 9(2) explicitly contemplates Article 9 products that do not designate any index as a reference benchmark. These products must include in their pre-contractual documents a clear explanation of why no benchmark was designated, and must provide an alternative means by which investors can assess whether the sustainable investment objective is being met.
In practice, this alternative typically consists of:
- Detailed description of the sustainable investment methodology
- Specific sustainability indicators and quantitative targets
- Explanation of how the investment universe is constructed
- Regular reporting on attainment of the sustainable investment objective
Pre-Contractual Disclosures for Article 9 Products
The RTS Annexes IV and V provide standardised templates for Article 9 pre-contractual disclosures. These are more detailed than the Article 8 templates, reflecting the higher ambition of Article 9 products.
Annex IV applies to Article 9 products with a reference benchmark. Annex V applies to Article 9 products without a reference benchmark.
Both templates require disclosure of:
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The sustainable investment objective: A precise statement of what environmental or social objective the product aims to achieve (e.g., "net-zero alignment by 2050," "biodiversity conservation," "inclusive economic growth in emerging markets")
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Means to attain the objective: The specific investment strategy elements, portfolio construction rules, and screening criteria used to achieve the objective
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All investments qualify as sustainable investments: Confirmation that all investments (with limited exceptions) meet the Article 2(17) definition, contribution, DNSH, and good governance
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DNSH methodology: How the "do no significant harm" principle is applied across all investments, including what indicators are used to measure harm
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Good governance assessment: How good governance practices of investee companies are assessed
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PAI consideration: Unlike Article 8 products, Article 9 products must consider PAI (Article 9(1) implicitly, and confirmed by RTS) and must disclose how PAI are considered at the product level
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Asset allocation breakdown: Percentage breakdown of investments into: sustainable investments (specifying environmental and social proportions), and other investments (with explanation)
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Reference benchmark details (Annex IV only): Name, alignment with objective, methodology differences from broad market index
Example, Article 9 pre-contractual disclosure for a climate-focused equity fund:
"Sustainable investment objective: This Fund's objective is to invest in equities that contribute to climate change mitigation in line with a 1.5°C global warming pathway, as specified by the IPCC, while ensuring no significant harm to other environmental and social objectives.
Sustainable investments: The Fund targets 100% of investments being sustainable investments as defined in Article 2(17) of Regulation (EU) 2019/2088. This is measured as:
- Contribution to climate change mitigation: each holding must derive at least 50% of revenue from climate solutions (renewable energy, energy efficiency, clean transport, etc.) OR have a verified science-based target aligned with a 1.5°C scenario
- DNSH: each holding must score below sector-average on all 14 mandatory PAI indicators in Annex I of Commission Delegated Regulation 2022/1288
- Good governance: each holding must have a minimum board independence ratio of 50% and no material tax controversy
Other investments: Up to 5% of the portfolio may consist of short-term liquidity instruments necessary for efficient portfolio management. These do not contribute to the sustainable investment objective but do not undermine it."
The 100% Sustainable Investment Expectation
The Commission's guidance and supervisory expectations have generally converged on the position that Article 9 products should aim for 100% sustainable investments (subject to limited exceptions for liquidity management, hedging, and technical portfolio construction requirements). The RTS (Recital 15) acknowledges that Article 9 products may need to make some non-sustainable investments where required by sector-specific rules, but these should be disclosed with their amount and purpose.
The wave of Article 9 to Article 8 downgrades in late 2022 and early 2023 was largely driven by managers reconsidering whether their products could genuinely sustain this expectation, many found that achieving 100% sustainable investments across large, diversified portfolios was more demanding than anticipated when they initially classified products as Article 9.
The Article 9 downgrade wave, what happened:
Between late 2022 and early 2023, managers including BlackRock, Amundi, and DWS reclassified funds totalling hundreds of billions of euros from Article 9 to Article 8.
The most common reason: the original Article 9 classifications were made under looser interpretations, before the RTS clarified that near-100% of investments must qualify as sustainable. When supervisors and legal teams applied stricter criteria, many funds that invested in "transitioning" companies, companies that were improving their sustainability profile but not yet fully sustainable, could no longer sustain the Article 9 claim.
This was a correction of over-classification, not a change in investment strategy. The funds largely continued investing the same way, but with a more accurate disclosure label.
Periodic Reporting for Article 9
Article 9(6) and RTS Annexes VIII and IX require Article 9 periodic reports to include:
- Overall sustainability indicators and results achieved
- How the sustainable investment objective was met during the period
- A comparison of portfolio performance versus the reference benchmark on sustainability indicators (where a benchmark is used)
- A year-by-year historical comparison
- Information on the top 15 investments by value and their sustainability contribution
Key Takeaways
- 1Article 9 products must have sustainable investment as their objective - every investment should in principle qualify as sustainable under the Article 2(17) three-part test
- 2Supervisory expectations converge on near-100% sustainable investments for Article 9, with limited exceptions only for cash, hedging, and technical portfolio management
- 3The DNSH assessment is technically demanding - for environmental investments, DNSH criteria align with the EU Taxonomy; for social investments, firms must develop their own methodology
- 4Article 9 products tracking Paris-aligned Benchmarks (PABs) benefit from a presumption that index constituents are sustainable investments
- 5The 2022-2023 Article 9 downgrade wave was largely a correction of over-classification, not a change in investment strategy - funds investing in 'transitioning' companies could not sustain the Article 9 standard
- 6Article 9 periodic reports must demonstrate delivery against committed sustainable investment proportions - shortfalls must be disclosed honestly with explanations