SFDR: A barrier to investment?

Europe’s Sustainable Finance Disclosure Regulation ("SFDR") requires financial market participants to disclose how sustainability risks are integrated into their products. Although designed as a disclosure regime, its Article 6, 8 and 9 categories have taken on a quasi-labelling function. This article explores how the recent SpaceX IPO has brought renewed attention to the “good governance” requirement for Article 8 and 9 funds. 

Article 6, "light green" and "dark green" funds under SFDR

Article 6 is the default category under the SFDR for all funds that do not hold themselves out as ESG funds. Funds will fall under Article 8 ("light green” funds) if they promote environmental or social characteristics, as long as their investments “follow good governance practices”. They must also specify how the environmental and/or social characteristics are met, and any reference benchmarks that they are aligned with. Article 9 ("dark green” funds) goes further – to qualify as a "sustainable investment", underlying investments must contribute to a social/environmental objective, while avoiding ‘significant harm’ to any other objective.

As of November 2025, EUR 6.8 trillion of assets were in funds classified as "light green" or "dark green" under SFDR, representing more than 60% of EU funds. In contrast, EUR 4.8 trillion was in Article 6 funds[1].

All along for the ride?

The recent IPO of SpaceX, with its unique governance structure, has become the most high-profile test of the requirement for underlying investments in Article 8 and 9 funds to ‘follow good governance practices’. Concerns centre on Elon Musk’s voting control, his role as head of the board, head of the executive and CTO, and his competing leadership positions in other major companies, such as Tesla.

In the round, shareholders are likely to have limited influence over SpaceX's board, strategy, executive decisions, capital allocation and future-risk taking. This has therefore generated concern that the basic requirement of "good governance" applicable to green SFDR funds might not be met. The implication of this is that more than 60% of EU funds were potentially restricted from participating in the largest IPO to ever have taken place, and potentially remain unable to hold shares in the sixth largest (as of the time of publication) company in the US market.

What is "good governance" under the SFDR, and how is it applied in practice? 

The SFDR regime does not provide a definition of what “good governance practices” are, which suggests that there is a far greater focus on the ‘environmental’ and ‘social’ aspects of the funds within its scope. It does refer to particular aspects of good governance in the context of Article 9 funds, prioritising “sound management structures, employee relations, remuneration of staff and tax compliance”. However, the undefined nature of the concept means that fund managers have a high level of discretion in practice. Financial market participants must carry out their own assessments of each investment, often against a set of internal "good governance" parameters and disclose their underlying assumptions. However, the flipside of this ambiguity is the risk of potential greenwashing allegations, meaning that investment managers may be cautious in exercising their discretion.

There have been mixed responses from investors. Some feel that it would be very difficult to invest in SpaceX whilst complying with the requirements under Articles 8 and 9 SFDR, whilst others may find ways to reconcile the "good governance" requirement with their strategies, given the relative prominence of SpaceX to the US market. For example, fund managers may employ an ESG integration strategy and hold SpaceX shares at weighting determined by the firm’s exposure to environmental, social and governance risks and potential, or prefer engagement with the leadership team of SpaceX on governance issues outside of legal rights that they hold in their capacity as shareholder, rather than excluding investment entirely. Additionally, a range of factors including employee relations and remuneration of staff are also relevant considerations to a company’s governance, so the shareholding structure may not be fatal to the SFDR’s requirements for “green” investments if other aspects are fulfilled. 

However, SpaceX has drawn into question how fund managers follow their own internal decision-making processes, and any departure from these may weaken the governance of the investors themselves. There is a need to apply the tests consistently, follow approval and disclosure procedures correctly, and ensure decisions are well-documented and justified. 

Some have compared the governance of SpaceX to that of Tesla, which is also owned and tightly controlled by Musk but has not been excluded from the investment portfolios of many SFDR funds. However, the single class shareholder structure of Tesla - compared to SpaceX's two classes of shares with different voting powers - and greater balance of powers within the company means that investors have perhaps found it easier to reconcile Tesla's governance with the requirements of SFDR. Whilst there have been other prominent companies with dual share class structure to provide founders with significant powers – such as Meta, in which Mark Zuckerberg holds approximately 14% of the shares but 61% of the voting power – there are further considerations concerning the overall governance picture at SpaceX, such as the decision to base the company in Texas, where there are fewer protections for minority shareholders.

In addition to the “good governance” requirement, “dark green” funds must fulfil a requirement to “do no significant harm”. This may also be an important consideration for managers of such funds seeking to invest in SpaceX, whose rocket launches generate significant greenhouse gas emissions, and whose Starshield satellites are used to provide assistance to the US military.

Incoming changes to SFDR

The European Commission's current proposal to overhaul the SFDR and create a simplified framework may go some way to overcoming concerns of investors over the ambiguity of the current requirements. The proposal would replace the current Article 8 and 9 regimes with three product categories with category-specific criteria and remove the "sustainable investment" and "good governance" concepts and their associated vagueness. In their place, it is expected to introduce new product categories of “Transition”, “ESG Basics” and “Sustainable” funds, each of which have separate applicable criteria. However, the recitals to the proposed amending regulation state that “the concepts of contribution to an environmental and social objective, of do not significant harm, and of good governance practices should continue to be reflected in the criteria of the relevant categories”, despite the lack of any operative terms to this effect. Whether or not the amendments to the SFDR will clarify the position on companies such as SpaceX therefore remains to be seen.