The revision of the SFDR is increasingly taking shape. In this article, we discussed the European Commission’s initial proposal for SFDR 2.0. The Council and the European Parliament’s ECON Committee have now also expressed their positions on the proposal. This is making it increasingly clear what the future SFDR framework could look like and which points remain under discussion.
There appears to be broad agreement on the most significant change. The current distinction between Article 6, 8 and 9 classifications is to be replaced by three product categories: ‘Transition’, ‘ESG Basics’ and ‘Sustainable’. For financial institutions, this could lead to significant changes in how sustainable financial products are classified and presented.
The European institutions have yet to agree on the precise requirements. Their positions differ, among other things, on reporting obligations, the role of the EU Taxonomy and the treatment of fossil fuel activities. These differences will be decisive in determining the final rules.
The legislative process is not yet complete. The Council and the Parliament have adopted their negotiating mandates. On 7 October 2026, the Parliament confirmed the mandate adopted by its ECON Committee. Negotiations between the Commission, the Council and the Parliament on a joint compromise text have now begun. Any political agreement will still need formal approval from the Parliament and the Council. SFDR 2.0 is therefore not yet law, and its final application date has not been set.
In this article, we compare the proposals and positions. Where do the European institutions agree, where do they still differ, and which issues are likely to be central to negotiations on the final text of SFDR 2.0?
The starting point for the revision: the Commission’s proposal
Before comparing the positions of the Commission, the Council and the Parliament, it is useful to recap what the Commission proposed.
The Commission’s proposal would first narrow the scope of the SFDR and significantly reduce reporting obligations. It would also remove the definition of ‘sustainable investment’. The current classification of Article 6, 8 and 9 products would be replaced with a new, voluntary categorisation system comprising three product categories:
- Transition
- ESG Basics
- Sustainable
These categories form the basis of the proposed SFDR 2.0 framework. The forthcoming negotiations will determine the conditions under which a product may be described as Transition, ESG Basics or Sustainable.
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Comparing the Commission, the Council and Parliament
The Commission’s proposal is the starting point for SFDR 2.0, but the Council and the Parliament place different emphasis on certain aspects. The main elements remain broadly aligned: all three envisage three new product categories and a 70% threshold.
The differences mainly concern the requirements products must meet to qualify for these categories and the practical implementation of the new framework. The table below summarises the main areas of agreement and difference between the positions.
| Subject | Similarities | Differences and sticking points |
|---|---|---|
| Categorisation system | Three voluntary product categories will be introduced: Transition, ESG Basics and Sustainable. In principle, at least 70% of a product’s investments must meet the criteria for the relevant category. The current definition of “sustainable investment” will be removed. Sustainability claims and product names reserved for a specific category may be used only if the product meets that category’s criteria. | The remaining differences mainly concern qualifying investments, exclusions, PAI requirements, the treatment of blended products and transitional arrangements. The Council alone generally caps the ramp-up period for meeting the 70% threshold at three years; the Commission and the Parliament do not set a fixed maximum period. The Parliament also introduces an annual website disclosure requirement. Financial market participants would have to report what proportion of their total assets under management and what proportion of their total number of products fall within each of the three categories. |
| Transition | A 70% threshold applies. Qualifying investments may include companies or activities with credible transition plans or science-based targets, portfolio-level objectives and other demonstrable contributions to the transition. Alternative qualification routes are also available through EU Climate Benchmarks and Taxonomy alignment. Engagement cannot be used as a standalone transition strategy; it must be combined with another qualifying transition strategy. | One of the main points of contention concerns investments in companies with fossil fuel activities. The Commission retains a 1% revenue exclusion for coal and lignite and also excludes companies developing new fossil fuel projects. Certain coal activities are also excluded where new projects are being developed or no phase-out plan is in place. The Council removes the 1% exclusion and replaces it with an exclusion for companies deriving revenue from coal, lignite, oil or gas. An exception applies to companies that allocate at least 20% of their total CapEx to Taxonomy-aligned activities and have a time-bound, measurable strategy for reducing Scope 1 and 2 emissions that is compatible with the Paris Agreement. The Parliament largely follows this carve-out but retains the 1% exclusion for coal and lignite. For coal-related activities, it also requires a phase-out plan. Over a rolling three-year period, a greater share of total CapEx must, on average, be allocated to Taxonomy-aligned activities than to the development of new fossil fuel projects. The Council and the Parliament also impose additional due diligence and monitoring requirements for investments that contribute to the transition objective. |
| ESG Basics | A 70% threshold applies. Qualifying investments may include investments with an ESG rating that outperforms the average of the investment universe or reference benchmark; investments that perform better against relevant sustainability indicators; combinations with investments qualifying for Transition or Sustainable; and other investments where sustainability factors are demonstrably integrated. | For the indicator-based route, the Commission requires outperformance on one relevant sustainability indicator, while the Council and the Parliament require outperformance on at least two. The Commission and the Parliament also retain a proven positive sustainability track record as a standalone qualification route. The Council removes this standalone route, but requires the residual category to favour companies or economic activities with a proven positive track record in sustainability processes, performance or outcomes. Only the Parliament introduces a product-level PAI requirement for ESG Basics, including disclosure of exposure to companies active in the fossil fuel sector. The Council also clarifies that private and real assets may contribute to the 70% threshold where the integration of sustainability factors is supported by documented information and methodologies appropriate to the relevant asset class. |
| Sustainable | A 70% threshold applies. Qualifying investments may include European Green Bonds, certain other use-of-proceeds instruments, operations under EU programmes and other investments that demonstrably contribute to an environmental and/or social sustainability objective. Alternative qualification routes are also available through an EU Paris-aligned Benchmark and a minimum share of Taxonomy-aligned investments. | The Council uses the wording “environmental and/or social objectives”, making explicit that a product may pursue an environmental or a social objective on its own. The Commission and the Parliament retain the wording “environmental and social objectives”. This does not necessarily mean that every product must combine both types of objective, but the wording is less explicit. For the Taxonomy route, the Commission and the Council set a 15% threshold, while the Parliament requires 20%. PAI requirements also differ. The Commission does not prescribe specific mandatory PAI indicators or a minimum number. The Council requires at least three PAI indicators relevant to the product. The Parliament specifies four minimum indicators for Sustainable products: exposure to fossil fuels, greenhouse gas emissions, adverse impacts on biodiversity-sensitive areas, and exposure to companies without processes and mechanisms to monitor compliance with the UN Guiding Principles on Business and Human Rights (UNGPs) and OECD Guidelines. |
| Impact | Impact is not a standalone product category, but an additional designation for Transition and Sustainable products. The impact add-on is not available for ESG Basics. Products using the add-on would be subject to additional pre-contractual and periodic disclosure requirements, including information on the intended impact, the theory of change, and how the intended impact and the contribution of the investment and the investor are measured, managed and reported. The term “impact” in product names is reserved for products using the impact add-on. The Commission defines impact as a pre-defined, positive and measurable environmental or social impact. | At Level 1, there is no substantive difference over the availability or core requirements of the impact add-on. The Council does, however, strengthen its recitals by placing greater emphasis on intentionality, real-world impact and measuring that impact within a theory of change. It also stresses that impact investing should address environmental and social needs that are not sufficiently met by market or government intervention, reinforcing the concept of additionality. The Parliament’s position is substantively aligned with those of the Commission and the Council and does not introduce materially different product requirements for the impact add-on. It does propose that a subgroup within the Platform on Sustainable Finance could advise on implementation, data availability and relevant international standards and approaches. |
| Blended products | A combined product, such as a fund of funds or multi-option product, may itself be categorised as Transition, ESG Basics or Sustainable if it meets the relevant 70% threshold and other category requirements through its underlying investments. Products that do not meet these requirements may provide only limited information about the share of their investments in categorised products. | The Council introduces an explicit hierarchy based on the lowest common denominator principle: a product that invests exclusively in Sustainable products and other investments qualifying for Sustainable is categorised as Sustainable; a combination of Sustainable and Transition is categorised as Transition; and if ESG Basics investments are also included, the product is categorised as ESG Basics. The Commission and the Parliament do not include this explicit hierarchy. The Parliament’s text appears to require a form of look-through to the qualifying share of the underlying portfolios when assessing the 70% threshold. The wording is not entirely clear, however, and this approach could prove more complex and demanding operationally than the Council’s. |
| Products that are not categorised | Products that are not categorised may provide limited information about whether and how they take sustainability factors into account. This information must be subordinate in both prominence and placement, presented neutrally and take up less than 10% of the space used to describe the investment strategy. It must not play a central role and should not, in principle, amount to sustainability claims reserved for categorised products. | The Council makes an explicit exception for claims about the integration of sustainability factors at ESG Basics level: these claims are permitted within the other restrictions. It also requires pre-contractual information to include a disclaimer stating that the product does not meet the minimum criteria under EU law for qualification as a sustainability-related financial product. The Parliament retains the restriction that information must not amount to a claim falling within Transition, ESG Basics or Sustainable. It also requires sustainability information to give a fair representation of the portfolio’s actual composition and prohibits references to voluntary sustainability labels whose requirements do not go beyond those of the EU categories. Periodic reporting must also prominently state that the product has not been categorised under the EU standards for sustainable financial products. |
| PAI indicators | The proposals include disclosure requirements relating to principal adverse impacts (PAIs) for sustainability-related products, with the indicators to be specified further at Level 2. The proposals mainly differ in how far the use of these indicators is mandatory. | The Commission does not set specific mandatory PAI indicators or a minimum number for Transition and Sustainable products. Use of the indicators to be developed at Level 2 is entirely voluntary. The Council requires Transition and Sustainable products to use at least three indicators from the Level 2 list that are most relevant to the product’s objectives. Alternative indicators are permitted only if it can be demonstrated that none of the listed indicators is relevant. Transition products that are permitted to invest in certain fossil fuel activities must also disclose a mandatory indicator for exposure to companies active in the fossil fuel sector. The Parliament prescribes specific minimum indicators for each product category. For Transition products, these are exposure to the fossil fuel sector, greenhouse gas emissions and at least one additional relevant indicator. ESG Basics products must include at least the indicator for exposure to the fossil fuel sector. Sustainable products must report four indicators: exposure to the fossil fuel sector, greenhouse gas emissions, activities that negatively affect biodiversity-sensitive areas, and exposure to companies without processes and mechanisms to monitor compliance with the UNGPs and OECD Guidelines. |
| EU-Taxonomie | The EU Taxonomy provides a separate qualification route for both Transition and Sustainable products. For Transition products, all three institutions use the same threshold: more than 15% of investments must be Taxonomy-aligned. | For Sustainable products, the Commission and the Council also set a threshold of more than 15% Taxonomy-aligned investments. The Parliament requires a higher share of more than 20%. |
| Opt-out and grandfathering | The Commission, the Council and the Parliament provide for grandfathering of closed-ended financial products that were created and distributed before the application date of SFDR 2.0 and are no longer distributed afterwards. The new product rules may be disapplied to these products. The Council and the Parliament also provide for an opt-out for AIFs available exclusively to MiFID II professional clients on request. | AIF opt-out: The Commission does not provide a separate opt-out for products offered exclusively to professional investors. The Council and the Parliament limit the opt-out to AIFs available exclusively to MiFID II professional clients on request; elective professional clients and retail investors are not covered. Under the Council’s proposal, the opt-out covers not only the product categories and rules for products that are not categorised, but also restrictions on sustainability claims in product names and marketing communications. The Parliament excludes these marketing and naming rules from the opt-out and imposes additional conditions on their use. Grandfathering: The Commission’s proposal covers closed-ended products created and distributed before the application date. The Council specifies that these products must be closed to new investors and must no longer be offered afterwards. The Parliament also clarifies that existing contractual obligations and sustainability information provided under SFDR 1.0 remain in force and are not treated as sustainability claims under SFDR 2.0. |
| Entry into force and transition | All three institutions provide for a transition period for the application of SFDR 2.0 and a separate arrangement for IBIPs, pension products, pension schemes and PEPPs. The Council and the Parliament set a 24-month application period for the general SFDR 2.0 regime following its entry into force, compared with 18 months in the Commission’s proposal. The Commission and the Parliament provide for the product-specific rules for these insurance and pension products to apply 12 months after the general application date. The Council and the Parliament also provide for certain entity-level obligations under SFDR 1.0 to fall away when Level 1 enters into force. These include entity-level PAI disclosures, the integration of sustainability risks into remuneration policies, and disclosure requirements for asset managers and financial advisers. |
Under the Commission’s proposal, the general application period is 18 months. The product-specific rules for IBIPs, pension products, pension schemes and PEPPs would apply 12 months later, or 30 months after entry into force. The Parliament sets a general period of 24 months, followed by an additional 12 months for these products, meaning the product-specific rules would apply after 36 months. The Council also sets a general application period of 24 months, but allows market participants to defer the product-specific rules for these insurance and pension products by up to 12 months. Those using this option must continue to apply SFDR 1.0 to the relevant products during that period and inform clients accordingly. Unlike the Council and the Parliament, the Commission does not provide for immediate relief from the SFDR 1.0 entity-level obligations described above; under its proposal, these would remain in force until the general application date. |
For a more detailed comparison, the Council has set out the positions of the Commission, the Council and the Parliament in a line-by-line overview.
What does this mean for the further negotiations?
The three negotiating positions show a considerable degree of agreement on the fundamental architecture of SFDR 2.0. All three include the three product categories—Transition, ESG Basics and Sustainable—and the 70% headline threshold. The negotiations are therefore likely to focus mainly on the precise conditions products must meet to qualify for these categories and the obligations attached to them.
One key issue is how stringent the criteria for each product category should be. The differences include which investments are permitted, which exclusions apply, and whether temporary derogations may be allowed through delegated legislation. On several points, the Council opts for greater flexibility, including for private markets and certain investments in companies with fossil fuel activities. The Parliament proposes stricter conditions in some areas. The treatment of sovereign and other public debt instruments, and the conditions under which they may count towards the categories, also require further alignment.
The role of PAI indicators also differs substantially. The Commission’s proposal does not prescribe specific mandatory indicators or a minimum number for Transition and Sustainable products. The Council requires at least three relevant PAI indicators for these categories. The Parliament opts for category-specific minimum indicators and also introduces a mandatory indicator for exposure to the fossil fuel sector for ESG Basics. The trilogue negotiations will therefore need to determine the extent to which PAI indicators become a mandatory and standardised part of the new product categories.
There is also disagreement over the alternative qualification route through the EU Taxonomy. For Transition, all three institutions use a 15% threshold. For Sustainable, the Commission and the Council also use 15%, while the Parliament proposes a higher threshold of 20%.
The treatment of blended products has also yet to be settled. The Council uses an explicit category hierarchy under which the lowest category in the combination generally determines the outcome. The Parliament’s text does not use the same hierarchy and appears to require a form of look-through to qualifying investments in the underlying products when assessing the 70% threshold. The wording is not entirely clear on this point and could prove more demanding operationally than the Council’s approach.
The Council and the Parliament appear to be moving towards a shared position on professional AIFs: both provide for an opt-out for AIFs available exclusively to MiFID II professional clients on request. The precise scope remains under negotiation. The Council also disapplies certain marketing rules, while the Parliament’s opt-out does not cover those rules and includes additional conditions. Since both co-legislators support an opt-out of this kind, its design appears to be the main open question.
Finally, agreement is needed on the transition to the new regime. The Council and the Parliament opt for a general application period of 24 months, compared with 18 months in the Commission’s proposal. Different transition mechanisms have also been proposed for certain insurance and pension products. Given that the Council and the Parliament agree on the general period, a 24-month application period appears more likely.
The central question in the negotiations is therefore no longer so much whether SFDR 2.0 will introduce three product categories with a 70% threshold, but how accessible or stringent those categories will ultimately be. The outcome of negotiations on exclusions, PAI indicators, alternative qualification routes, blended products and the professional AIF opt-out will determine how much flexibility financial market participants have and how much they will need to adjust existing products, investment strategies and disclosures.
Looking ahead
Now that the Council and the Parliament have negotiating mandates, trilogue negotiations on SFDR 2.0 have begun. The central challenge is to balance flexibility and reduced burdens with comparability and protection against greenwashing. The main points of contention are expected to include mandatory PAI indicators, Taxonomy thresholds, fossil fuel investments, the treatment of blended products and the scope for sustainability claims by products that are not categorised. A key consideration will be ensuring that the final category criteria are sufficiently clear and applied consistently, so that the market does not end up with product labels that are difficult to compare once again.
Even after agreement is reached on the Level 1 regulation, SFDR 2.0 will not be fully developed. Many of the criteria, indicators, calculation methods and disclosure requirements will then need to be specified further in Level 2 legislation.
The application period has also yet to be finalised. The Commission proposes 18 months after entry into force, while the Council and the Parliament propose 24 months. A further 12 months has also been proposed for certain insurance and pension products. In view of the negotiations still to come and the proposed transition periods, the new regime is expected to apply no earlier than late 2028, and probably not until 2029.
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