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This methodology sets out how Integrum ESG assesses every holding in a fund against the 14 mandatory principal adverse impact (PAI) indicators for investee companies under the EU Sustainable Finance Disclosure Regulation (SFDR). It then explains how we classify each company, and the fund as a whole, as suitable for Article 6, 8 or 9.
Overview
What SFDR requires
Any fund marketed in the EU that seeks Article 8 or Article 9 status must answer a specific set of questions on how ESG considerations are integrated into its management. It must also consider each holding against the mandatory PAIs.
The purpose is to make every fund that markets itself as sustainable check whether any of its investments are working against the EU’s core environmental and social objectives. Our methodology turns that requirement into a repeatable process in four stages:
- Assess each PAI Every holding is assessed against each of the 14 PAIs and given a colour.
- Classify each company The colours, together with evidence of good governance, determine whether each company is suitable for an Article 6, 8 or 9 fund.
- Check the fund policies The fund manager confirms which SFDR fund policies it commits to.
- Classify the fund The fund is classified from the share of its holdings, by value, that are suitable for each Article and the policies it has committed to.
Indicators
The 14 mandatory PAIs for investee companies
The SFDR Regulatory Technical Standards (Delegated Regulation (EU) 2022/1288) set out the mandatory indicators in Table 1 of Annex I. Indicators 1 to 14 apply to investee companies:
| No. | Indicator | Theme |
|---|---|---|
| 1 | GHG emissions (Scope 1, 2, 3 and total) | Climate |
| 2 | Carbon footprint | Climate |
| 3 | GHG intensity of investee companies | Climate |
| 4 | Exposure to companies active in the fossil fuel sector | Climate |
| 5 | Share of non-renewable energy consumption and production | Climate |
| 6 | Energy consumption intensity per high impact climate sector | Climate |
| 7 | Activities negatively affecting biodiversity-sensitive areas | Biodiversity |
| 8 | Emissions to water | Water |
| 9 | Hazardous waste and radioactive waste ratio | Waste |
| 10 | Violations of UN Global Compact principles and OECD Guidelines for Multinational Enterprises | Social and employee matters |
| 11 | Lack of processes and compliance mechanisms to monitor compliance with the UN Global Compact and OECD Guidelines | Social and employee matters |
| 12 | Unadjusted gender pay gap | Social and employee matters |
| 13 | Board gender diversity | Social and employee matters |
| 14 | Exposure to controversial weapons | Social and employee matters |
Data
Data sourcing and proxy data
Many of the PAIs correspond directly to data points we already hold for each company, taken from company disclosures. Where the precise data the SFDR text specifies is not available, we use relevant proxy data. Article 7(2) of the SFDR Regulatory Technical Standards allows financial market participants to make reasonable assumptions where information on an indicator is not readily available.
Worked example: the unadjusted gender pay gap
Most companies around the world do not disclose their gender pay gap, so PAI 12 needs proxy data. We use gender diversity in the workforce and alignment with UN Sustainable Development Goal 5 (gender equality). Together, these show whether a company is doing harm to the EU objective behind the indicator: treating women in the workplace fairly.
Transparency on every PAI
Each PAI carries a tooltip explaining the data we use for the assessment. Where a company discloses detail we can use, it is shown in a Glass Box: clicking “view detail” on any company-level PAI reveals the underlying data and the reason for our assessment. Our Company ESG Scores and Glass Box Methodology explains the Glass Box in full. PAI results can be viewed for individual companies and across a whole portfolio.
PAI level
The PAI colour system
We give each company a colour on each PAI to show its alignment with that indicator.
| Colour | What it means |
|---|---|
| Green: good disclosure | The company offers a reasonable to good level of disclosure on the indicator and is not having an adverse impact on the EU objective it relates to |
| Yellow: poor disclosure | The indicator is relevant to companies in this sector, but the company does not sufficiently disclose the metric. A company suitable for an Article 8 or 9 fund should have only a minority of its PAIs marked yellow |
| Red: poor performance | The company is performing poorly on the indicator, to the extent that it could be regarded as significantly harming the underlying EU objective |
| Grey: not material | Neither we nor the ISSB regard the indicator as relevant to companies in this sector, so the company can fairly be assumed not to harm the EU objective it relates to |
Company level
Classifying each company as Article 6, 8 or 9
SFDR does not require Article classifications at company level. We assign them because they form an important bridge between assessing PAIs for each holding and classifying the fund as a whole.
| Classification | Rules |
|---|---|
| Article 9 | No PAIs marked yellow or red, support for the 12 sustainability objectives we derive from SFDR Article 2(17), set out in our EU Sustainable Investment Audit Methodology, and clear evidence of good governance practices |
| Article 8 | No more than four PAIs marked yellow or red combined, with clear evidence of good governance practices |
| Article 6 | Any company that does not meet the Article 8 or Article 9 rules |
Why these thresholds
- Disclosure: SFDR is a disclosure requirement, so an investee company should disclose data for a majority of the 14 PAIs. Allowing no more than four yellows or reds keeps at least ten PAIs green or grey.
- Article 8: the legislation does not rule out holding companies that perform poorly on an indicator, provided the fund manager engages with them. An Article 8 fund must still promote environmental or social characteristics, so its investee companies should not carry more than four poor results.
- Article 9: an Article 9 fund has sustainability as its objective and should only target companies that do no significant harm to the EU’s environmental and social objectives. We therefore do not classify any company with a red PAI as suitable for an Article 9 fund.
- Governance: the PAIs focus on environmental and social objectives, but SFDR also requires investee companies to follow good governance practices, so both Article 8 and Article 9 need clear evidence of them.
Worked example
A company has nine PAIs marked green, two marked grey, two marked yellow and one marked red, with clear evidence of good governance. With three yellows and reds combined, it is suitable for an Article 8 fund. Because it has yellow and red PAIs, it is not suitable for an Article 9 fund.
Fund level
Classifying the fund
A fund manager must answer a specific set of questions on how ESG considerations are integrated into the management of the fund. These are the SFDR policies for the fund, shown on the fund’s portfolio overview, and their wording is taken directly from the SFDR legislative text.
| Classification | Fund policies | Holdings test |
|---|---|---|
| Article 9 | Commits to policies 1 to 10 | At least 80% of holdings by value suitable for an Article 9 fund |
| Article 8 | Commits to policies 1 to 8 | At least 80% of holdings by value suitable for an Article 8 fund |
| Article 6 | Any fund that does not meet the Article 8 or Article 9 tests | |
Why an 80% hurdle
SFDR makes clear that not every holding in an Article 8 fund must be suitable, but a clear majority must be. Integrum ESG has set the hurdle at 80% of holdings, weighted by the amount invested, to be consistent with the US SEC Names Rule. That rule requires certain funds to adopt a policy to invest at least 80% of their assets in line with the investment focus their name suggests.
Worked example
A fund manager commits to SFDR fund policies 1 to 8. Holdings worth 86% of the fund are individually suitable for an Article 8 fund, so the fund is classified as Article 8. If the share fell to 75%, the fund would be classified as Article 6 until the share returned to 80% or more.
Fund classifications sit alongside each fund’s other outputs, from ESG grades under the Integrum ESG Scoring Framework to carbon footprint and temperature score. An Annex I PAI report can be generated in one click.
Regulation
SFDR 2.0
This methodology applies SFDR as it currently stands. In November 2025, the European Commission proposed replacing the Article 8 and 9 structure with three product categories: Transition, ESG Basics and Sustainable. The Council and the European Parliament have adopted their negotiating positions, and the final text will be settled in trilogue, with the new regime expected to apply from late 2028 or early 2029. We are tracking the reform and will update this methodology as the final rules are agreed.
FAQs
Frequently asked questions
What are principal adverse impact (PAI) indicators?
PAIs are the indicators SFDR uses to measure the negative effects of investments on environmental and social factors. Table 1 of Annex I to the SFDR Regulatory Technical Standards sets out 14 mandatory PAIs for investee companies, covering emissions, biodiversity, water, waste, social and employee matters and controversial weapons.
How does Integrum ESG decide whether a company is suitable for an Article 8 fund?
A company is suitable for an Article 8 fund if no more than four of its 14 PAIs are marked yellow (poor disclosure) or red (poor performance) combined, and there is clear evidence of good governance practices.
How does Integrum ESG decide whether a company is suitable for an Article 9 fund?
A company is suitable for an Article 9 fund only if none of its PAIs are marked yellow or red, it supports the 12 sustainability objectives we derive from SFDR Article 2(17) and there is clear evidence of good governance practices.
How is a fund classified as Article 8 or Article 9?
The fund manager must commit to SFDR fund policies 1 to 8 for Article 8 or 1 to 10 for Article 9, and at least 80% of the fund’s holdings by value must be individually suitable for that Article. Any other fund is classified as Article 6.
What happens when a company does not disclose the data a PAI needs?
Where the relevant metric is material to the company’s sector but not disclosed, the PAI is marked yellow for poor disclosure. Where the exact data is not widely disclosed by companies, such as the unadjusted gender pay gap, we use relevant proxy data, as Article 7(2) of the SFDR Regulatory Technical Standards allows.
Does an Integrum ESG classification confirm a fund’s SFDR status?
Only financial regulators and market authorities can rule on whether a fund can be marketed in the EU as Article 6, 8 or 9. Our classification methodology is designed to be consistent with the current legislative texts, and investment firms should take qualified legal advice before relying on it as evidence of compliance.
Will the methodology change under SFDR 2.0?
SFDR 2.0 is still being negotiated and is expected to apply from late 2028 or early 2029. This methodology applies the current SFDR, and we will update it as the final rules are agreed.
Check your funds against SFDR
Speak to our team to see the PAI assessment and Article classification for every holding in your funds.