The Council of the European Union has today agreed its negotiating position on a comprehensive overhaul of the Sustainable Finance Disclosure Regulation (SFDR), aiming to eliminate greenwashing, simplify complex disclosure rules, and redirect capital towards Europe’s strategic climate goals.
The update replaces existing framework concepts—which have frequently been criticised for creating market confusion and enabling misleading environmental claims—with a streamlined three-category system for financial products sold within the EU.
Under the newly proposed framework, financial products will be classified into three distinct tiers:
- Sustainable: Products that directly support sustainability objectives by investing in companies or projects that already meet exceptionally high standards.
- Transition: Products that channel capital towards companies or initiatives that are not yet sustainable but are committed to a credible, verified path toward improvement.
- ESG Basics: Products that integrate general environmental, social, and governance approaches but do not satisfy the rigorous criteria required for the sustainable or transition tiers.
To bolster market comparability and prevent “greenwashing”, the Council’s position mandates that financial market participants must use at least three specific indicators from an upcoming European Commission list when disclosing the principal adverse impacts of their investments.
In a significant move to address real-world industrial shifts, the Council clarified that investments in the fossil fuel sector can qualify for the “transition” category under strict conditions. To be eligible, the target company must allocate at least 20 per cent of its capital expenditure to economic activities aligned with EU taxonomy rules, maintain a clear, time-bound greenhouse gas emissions reduction strategy, and face assessment against a mandatory fourth adverse impact indicator to ensure heightened transparency.
The Council also introduced provisions to explicitly allow general-purpose issuances from EU-established public sector bodies to be included in the transition category under specific conditions, acknowledging their substantial role in pension and insurance portfolios.
Concurrently, the new mandate offers significant regulatory relief to fund managers. Financial market participants will be permitted to bypass these rigid categorisation provisions for alternative investment funds offered exclusively to professional investors, recognizing that institutional clients do not require the same standardised disclosures as retail consumers.
The SFDR has been active since March 2021, but a comprehensive review by the European Commission revealed that the framework produced overly complex, lengthy disclosures. Instead of acting as a clear disclosure tool, the original regulation inadvertently functioned as a flawed labelling system that increased mis-selling risks.
The agreement reached today establishes the Council’s official mandate. Interinstitutional negotiations to finalise the updated text will commence as soon as the European Parliament adopts its own negotiating position.
