While much of the market’s attention has focused on the higher-tier classifications - Article 8 (products that promote environmental or social characteristics) and Article 9 (products with sustainable investment as their objective) - the reality is that the vast majority of funds in the market sit within Article 6.

This article explains what an SFDR Article 6 fund is, where they are typically established, how they differ from Articles 8 and 9 products, and how SFDR interacts with non-EU fund structures - a question of particular significance for managers domiciling funds in offshore jurisdictions such as the Cayman Islands, the British Virgin Islands and Bermuda.

An SFDR Article 6 fund is a financial product that does not promote environmental or social characteristics (Article 8) and does not have sustainable investment as its objective (Article 9). In practical terms, Article 6 is the default classification: any fund that does not make specific ESG commitments in its investment process falls within this category.

Article 6 does not mean a fund ignores sustainability risks entirely. Under Article 6(1) of the SFDR, managers of Article 6 products must still disclose the manner in which sustainability risks are integrated into their investment decisions, or explain why sustainability risks are not considered relevant. This is a disclosure obligation, not an investment mandate — the fund is not required to adopt any ESG strategy, but it must be transparent about its approach.

Article 6 funds must also comply with pre-contractual disclosure requirements under Article 6(2), including a statement in offering documents on whether and how the product considers principal adverse impacts (PAIs) on sustainability factors. Where PAIs are not considered, an explanation must be provided.

A common misconception is that Article 6 funds are “non-ESG” or sit outside the SFDR framework. This is incorrect. Every financial product offered by an EU-regulated financial market participant falls within the scope of the SFDR and must be classified. Article 6 is simply the baseline category for products that do not make affirmative ESG commitments beyond the minimum disclosure requirements.

Article 6 funds are established across a wide range of jurisdictions, both within and outside the EU. The SFDR classification itself does not dictate where a fund must be domiciled - it is a disclosure regime that applies to the manager (or, more precisely, to the financial market participant making the product available), not to the fund vehicle itself.

Within the EU, Article 6 funds are commonly structured in Luxembourg, the largest European fund domicile. Luxembourg offers well-established regulatory frameworks and is home to the majority of UCITS and EU-regulated alternative investment funds. Many managers without an ESG-specific strategy will establish their funds in Luxembourg and classify them as Article 6 funds by default.

Outside the EU, a significant number of funds that are classified as Article 6 — or that would be classified as such if marketed into the EU — are domiciled in offshore jurisdictions. The Cayman Islands remains the dominant global fund domicile for alternative investment funds, particularly hedge funds, private equity vehicles and venture capital structures. The British Virgin Islands and Bermuda are also well-established fund jurisdictions. These offshore fund structures do not fall directly within the scope of the SFDR, but SFDR classification becomes relevant when the fund is marketed to EU investors by an EU-regulated manager or distributor, or where a non-EU manager delegates to or is managed by an EU-regulated AIFM.

The distinction between Articles 6, 8 and 9 is one of the most frequently misunderstood aspects of the SFDR. The three categories are best understood as a disclosure spectrum rather than a quality ranking.

Article 6 products are the baseline. They have no binding ESG commitments and are subject only to the minimum sustainability risk disclosure requirements described above. The manager must disclose how (or whether) sustainability risks are integrated and must address PAIs in pre-contractual materials.

Article 8 products promote environmental or social characteristics (or a combination of both) as part of their investment strategy, provided that the investee companies follow good governance practices. Article 8 products are subject to enhanced pre-contractual, periodic and website disclosure obligations under the SFDR Delegated Regulation (the Regulatory Technical Standards, or RTS). These products are sometimes referred to as “light green” funds.

Article 9 products have sustainable investment as their objective. This is the highest tier of SFDR classification, requiring the fund to demonstrate that all of its investments (subject to limited exceptions for hedging and liquidity) qualify as sustainable investments within the meaning of the SFDR. Article 9 products face the most extensive disclosure requirements and are sometimes referred to as “dark green” funds.

A key practical point is that SFDR classification is not permanent. Funds may be reclassified — for example, an Article 8 fund that can no longer demonstrate that it promotes environmental or social characteristics may need to be downgraded to Article 6. In 2022 and 2023, a number of high-profile fund reclassifications from Article 9 to Article 8 took place as managers reassessed whether their products could meet the stringent requirements of Article 9 classification.

The interaction between the SFDR and non-EU fund structures is one of the most nuanced aspects of the regulation, and an area where market practice continues to develop.

The SFDR applies to financial market participants and financial advisers that are established in the EU, or that make financial products available within the EU. This means that a non-EU fund is not itself directly subject to the SFDR. However, SFDR obligations attach to the EU-regulated entity in the distribution chain. Where a non-EU fund is marketed into the EU under the AIFMD national private placement regimes, SFDR disclosures are required at the point of distribution by the EU-regulated entity (typically an EU AIFM, or a distributor subject to MiFID II).

In practice, this creates a two-tier dynamic. The offshore fund vehicle itself is structured under the laws of its domicile and is not required to comply with the SFDR as a matter of local law. However, the EU-regulated manager or distributor that offers the product to EU investors must classify the fund under the SFDR framework (as Article 6, 8 or 9) and make the corresponding disclosures. The classification decision therefore typically sits with the EU-regulated entity, not the fund itself.

For non-EU managers who do not have an EU-regulated AIFM but who market their funds into the EU under national private placement regimes, the position varies by member state. Some member states require SFDR-equivalent disclosures as a condition of marketing authorisation; others do not. Managers in this position should take specific advice on the requirements of each target jurisdiction.

The key takeaway for managers of offshore fund structures is that SFDR classification is driven by the regulatory status of the entity making the product available in the EU, not by the domicile of the fund. A Cayman Islands fund is not inherently “outside” the SFDR — its classification depends on how, and by whom, it is distributed. For most offshore funds that do not make specific ESG commitments, Article 6 will be the appropriate default classification when the fund is marketed to EU investors through an EU-regulated channel.

We are one of the world’s leading offshore law firms, with deep expertise in the formation and structuring of investment funds in Luxembourg, the Cayman Islands, the British Virgin Islands and Bermuda. Our investment funds team advises managers, sponsors, institutional investors and service providers across the full lifecycle of a fund, from initial structuring through to regulatory compliance, restructuring and wind-down.

In the context of SFDR and cross-border fund distribution, we regularly assist clients with:

• structuring onshore and offshore fund vehicles (including exempted limited partnerships, segregated portfolio companies and standalone corporate funds) with a view to EU and global distribution strategies
• advising on the interaction between onshore and offshore fund structures and EU regulatory frameworks, including SFDR classification considerations, AIFMD compliance and national private placement regime requirements
• reviewing and drafting offering documents, side letters and fund governance documentation to ensure alignment with applicable disclosure obligations
• coordinating with onshore counsel in the EU, the UK and other jurisdictions to deliver integrated, cross-border structuring advice

For further information on how SFDR classification may affect your onshore or offshore fund structure, or to discuss any of the issues raised in this article, please contact a member of our investment funds team.