The European Commission's 20 November 2025 SFDR 2.0 proposal rewrites the EU's sustainable finance disclosure rulebook. For asset managers running funds with carbon removal exposure (whether investing directly in removal technologies, holding portfolio companies pursuing net-negative strategies, or buying credits to offset operational emissions), the rules around what you can claim, how you classify, and what you must disclose are tightening significantly.
This article sets out where carbon removals fit in the new category structure, what changes versus SFDR 1.0, and the operational steps Article 8 and Article 9 fund managers should be taking now.
Direct answer. SFDR 2.0 treats carbon removals in two distinct ways. Funds that invest in carbon removal companies, technologies, or projects (biochar, BECCS, DACCS, enhanced rock weathering, afforestation, blue carbon) can qualify for the new Article 7 (Transition) or Article 9 (Sustainable) categories, provided 70% of the portfolio meets that category's eligibility criteria, mandatory exclusions are applied, and product-level Principal Adverse Impact (PAI) indicators are disclosed. Buying carbon removal credits to offset a fund's own operational footprint does not on its own satisfy any SFDR 2.0 category and cannot be used as a sustainability claim in marketing. The regulation is expected to apply from late 2027 or 2028, with no transitional grandfathering.
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The structural change: three categories, one 70% rule
SFDR 1.0's Article 6, 8, and 9 disappear as we know them. Three new product categories take their place, each requiring at least 70% of investments to align with the category's objective and each subject to mandatory exclusions referencing the EU Climate Transition Benchmark (CTB) and Paris-Aligned Benchmark (PAB) rules.
Article 7 (Transition): products supporting an environmental or social transition. 70% of investments must meet a clear, measurable transition objective.
Article 8 (ESG Basics): products applying basic ESG criteria, replacing the SFDR 1.0 Article 8 "light green" category.
Article 9 (Sustainable): products targeting measurable sustainability objectives, with 70% of investments meeting strict eligibility criteria.
A new Article 9a covers combination products (funds of funds with a mix of categorised products). Article 6a covers everything else, with one important restriction: uncategorised funds cannot use sustainability claims in their names or marketing communications, and sustainability cannot be a "central element" of pre-contractual disclosures.
Impact investing is formally recognised for the first time, embedded as compatible with both Article 7 and Article 9. The "sustainable investment" definition under SFDR 1.0 Article 2(17) is removed, along with the embedded "Do No Significant Harm" mechanism, replaced by category-specific exclusions and product-level PAI indicators. Entity-level PAI reporting is dropped. Portfolio managers and financial advisers fall out of scope, but delegated portfolio managers remain affected contractually.
The proposal must clear the EU's legislative process. Once published in the Official Journal, the regulation enters force 18 months later, with the earliest realistic application date late 2027 or 2028. There is no transitional grandfathering and, in the published version, no exemption for professional investor-only funds.
Where carbon removals fit
Article 7 (Transition): the most likely home for most carbon removal exposure
Most fund strategies built around carbon removal technologies (Direct Air Capture, biochar, BECCS, enhanced rock weathering, sustainable forestry, agroforestry) sit naturally under Article 7. These are activities that contribute to climate change mitigation through enhanced GHG removal, which the EU explicitly recognises as a Paris-aligned mitigation pathway.
To qualify, an Article 7 fund must demonstrate:
70% of investments aligned to a measurable transition objective (for example: net CO₂e removed, tonnes of permanent storage delivered, reduction in portfolio emissions over a defined timeframe).
Application of CTB/PAB-style mandatory exclusions on harmful activities.
Product-level PAI disclosure with mitigating actions.
A binding investment strategy and credible sustainability indicators.
For managers building thematic CDR funds (a category that now includes high-profile vehicles backed by Frontier, Microsoft, and Apple's Restore Fund), Article 7 offers a defensible classification provided the fund can show how each investment contributes to the stated transition objective with measurable carbon outcomes.
Article 9 (Sustainable): a higher bar for already-delivering assets
Article 9 is reserved for investments in companies or projects that already meet high sustainability standards. For carbon removals, that means assets generating verified, durable removal outcomes at scale and aligning with EU Taxonomy criteria where applicable.
Examples already in the market include sustainable forestry funds investing exclusively in EU Taxonomy-aligned forest management with verified net carbon sequestration (the United Bankers Forest Funds model), funds investing in carbon-credit-generating timberland and nature-based assets with verified additionality (Stafford Capital's SCOOF), and permanent removal infrastructure operators with verified storage at commercial scale.
The Article 9 bar is high. Most early-stage CDR portfolios will struggle to meet it and should target Article 7 instead.
What carbon removals cannot do under SFDR 2.0
Buying carbon credits to offset a fund's own operational footprint does not qualify the fund for any sustainability category. SFDR 2.0 categorises products based on what their underlying investments do, not on offset purchases at the fund vehicle level. Managers who currently market "carbon-neutral funds" by retiring credits against management company emissions will need to revise that language carefully if the underlying product cannot also qualify for Article 7, 8, or 9.
This separation is deliberate. The Commission's stated goal is to ensure sustainability claims reflect what the underlying portfolio actually does.
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The data and disclosure implications
For any fund using carbon removals as part of an Article 7 or Article 9 strategy, SFDR 2.0 raises four operational requirements.
1. Verifiable quality of removal credits or underlying assets. Funds investing in carbon removal credits or projects need defensible quality evidence: third-party certification (Verra VCS, Gold Standard, Puro.earth, Isometric), ICVCM Core Carbon Principles labelling where available, EU Carbon Removal Certification Framework (CRCF) alignment for projects in EU jurisdictions, and documented additionality, permanence, and leakage risk assessment.
2. Product-level PAI disclosure. Article 7 and Article 9 products must identify Principal Adverse Impact indicators and disclose mitigation actions. For carbon removal portfolios, that includes biodiversity, water, land use, and community impact indicators that nature-based and engineered removals often raise.
3. Mandatory exclusions. All three categorised products apply CTB/PAB-style exclusions. Managers running carbon removal investments alongside conventional assets need to confirm the broader portfolio meets these exclusion thresholds.
4. Marketing alignment. Marketing communications must be clear, fair, not misleading, and consistent with SFDR 2.0 disclosures. Vague "net zero fund" or "climate positive" language without a categorised strategy behind it will breach the Article 6a marketing restrictions.
At Regreener, we work with corporate finance and investment teams sourcing high-integrity carbon removal credits and project exposure for portfolio-level claims. The funds that have invested in rigorous credit-quality evaluation early are significantly better positioned to make defensible SFDR 2.0 claims than those relying on broad certification labels alone.
What asset managers should be doing now
The legislative text will change in trialogue. The 70% threshold may shift. PAI requirements may evolve. Even so, the direction is clear, and the operational preparation is largely the same regardless of the final text.
Audit current Article 8 and 9 funds with carbon removal exposure. Identify which can transition to Article 7 (most CDR-focused funds), which can credibly target Article 9 (fewer), and which need to drop sustainability claims.
Stress-test the 70% alignment threshold. Model each fund's portfolio against the proposed criteria. Identify gaps.
Tighten the quality screen on removal credits and projects. A multi-domain evaluation across carbon integrity, measurement and verification, beyond-carbon co-benefits, developer governance, and market integrity sets the foundation for defensible disclosures.
Build product-level PAI infrastructure. Entity-level PAI is going away, but product-level PAI for Article 7 and 9 is becoming more rigorous.
Review marketing copy. Anywhere a non-categorised product currently makes sustainability claims, plan revision before late 2027.
Managers that prepare in 2026 will face significantly less reclassification risk in 2027 than those who wait for the final legislative text.
