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 clearer product categories: ‘Transition’, ‘ESG Basics’ and ‘Sustainable’. For financial institutions, this could lead to far-reaching changes in the way sustainable financial products are classified and presented.
However, the European institutions have not yet agreed on the precise conditions. Their positions differ on, among other things, the reporting obligations, the role of the EU Taxonomy and the way fossil fuel activities should be treated. These differences in particular will be decisive for the final rules.
The legislative procedure has not yet been completed. The Council and the European Parliament have now adopted their negotiating mandates. Parliament confirmed the mandate adopted by the ECON Committee on 7 October 2026. This allows trilogue negotiations on a joint legislative text to begin. Any agreement must subsequently still be formally approved by Parliament and the Council. SFDR 2.0 is therefore not yet applicable law, and the definitive date of application has not yet been established either.
In this article, we compare the proposals and positions. Where do the European institutions already agree, where do they still differ and which issues are expected to take centre stage during the negotiations on the final legislative text of SFDR 2.0?
The starting point for the revision: the Commission proposal
Before comparing the positions of the Commission, the Council and Parliament, we briefly refresh our memories. What did the European Commission propose?
The Commission proposal first provided for a narrowing of the scope of the SFDR and a substantial reduction in reporting obligations. In addition, the definition of ‘sustainable investment’ would be removed. The current classification into Article 6, 8 and 9 products would be replaced by a new, voluntary categorisation system with 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 designated as Transition, ESG Basics or Sustainable.
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Comparing the Commission, the Council and Parliament
The Commission proposal forms the starting point for SFDR 2.0, but the Council and Parliament place different emphases on various aspects. The main outlines remain largely intact: all three envisage three new product categories and a threshold of 70%.
The differences mainly concern the conditions that products within these categories must meet and the practical details of the new framework. The table below provides an overview of the main similarities and differences between the positions.
| Subject | Similarities | Differences and sticking points | |
| Categorisation system | Three categories: Transition, ESG Basics and Sustainable. In principle, a 70% threshold applies to each category. The definition of “sustainable investment” is removed and sustainability claims are linked to categorisation. | The basic structure does not appear to be a point of contention. However, the institutions differ on the precise conditions, product-level PAIs and the treatment of mixed products. Parliament also adds an annual transparency obligation concerning the proportion of categorised products and AUM. | |
| Transition | All three apply 70% and recognise, among other things, Taxonomy alignment, climate benchmarks, transition plans, science-based targets, engagement and portfolio objectives as possible transition strategies. | The treatment of companies active in the fossil fuel sector is a major sticking point.The Commission proposal excludes companies developing new projects for the exploration, extraction, distribution or refining of coal, oil or gas from the Transition category. Companies developing new coal projects or without a coal phase-out plan are also excluded.The Council and the European Parliament take a different approach. Investments in companies that derive revenue from fossil fuel activities remain possible where these companies allocate at least 20% of their total capital expenditure to Taxonomy-aligned activities and have a time-bound and measurable strategy for reducing their Scope 1 and Scope 2 emissions, in line with the Paris Agreement.Parliament imposes additional conditions. Companies that use coal or lignite for electricity generation must have a time-bound and measurable phase-out plan. Furthermore, over each rolling three-year period, a larger share of total capital expenditure must, on average, be allocated to Taxonomy-aligned activities than to the development of new fossil fuel projects. The Council does not impose this additional relative CapEx test. The three-year period is therefore not a separate three-year transition plan, but the period over which the average ratio between green and new fossil fuel capital expenditure is calculated. | |
| ESG Basics | 70% threshold; possible routes include an above-average ESG rating, above-average sustainability performance or a demonstrably positive sustainability profile. | Under the indicator route, the Commission requires performance on one appropriate indicator; the Council and the EP require at least two. Only the EP adds product-level PAIs, including mandatory exposure to the fossil fuel sector. The Council sets out in greater detail how private assets, real assets and public debt can qualify. | |
| Sustainable | 70% threshold; eligible investments include PAB strategies, Taxonomy-aligned activities, European green bonds, EU programmes and other investments that demonstrably contribute. | The Commission and the EP refer to environmental and social objectives; the Council to environmental and/or social objectives. The Council thus makes clearer provision for a product with solely an environmental or a social objective. Furthermore, the alternative Taxonomy threshold is 20% in the EP’s position, compared with 15% for the Commission and the Council. The mandatory PAI indicators also differ. | |
| Impact | Almost complete agreement: impact will not be a separate category, but an additional designation for Transition and Sustainable products. Requirements include predefined, positive and measurable impact, a theory of change, and the measurement, management and reporting of impact and investor contribution. | This does not appear to be a major sticking point in the trilogues. The further operationalisation of intentionality, real-world impact and investor contribution may still give rise to discussion. | |
| Blends | All three allow look-through: investments in underlying categorised products | The Council introduces an explicit hierarchy: exclusively Sustainable → Sustainable; Sustainable plus Transition → Transition; as soon as ESG Basics is added → ESG Basics. The Commission and the EP do not include this explicit downgrading hierarchy. The arrangements for uncategorised funds of funds and multi-option products also differ. | |
| PAI indicators | For Transition and Sustainable, PAIs must be identified and explained, and the measures being taken must be specified. The indicators will be further specified by delegated act. | The Commission leaves the use of indicators largely flexible. For Transition and Sustainable, the Council requires at least three relevant indicators, with additional fossil fuel information for relevant Transition products. The EP is more prescriptive: for Transition, greenhouse gas emissions, fossil fuel exposure and at least one relevant indicator; for Sustainable, four specific indicators. Only the EP also introduces a PAI obligation for ESG Basics. | |
| Uncategorised products | Uncategorised products may provide limited information on the integration of sustainability factors, provided that it is not central, is not included in the KID/KIID and does not constitute a categorisation claim. The information must account for less than 10% of the description of the investment strategy. Product names must not contain a sustainability claim. | The EP requires the information to accurately reflect the actual portfolio and adds a disclaimer stating that the product is not categorised and therefore does not have to report adverse environmental impacts. The Council requires the clearer disclaimer that the product does not meet the minimum criteria for a sustainability-related financial product under Union law. | |
| EU Taxonomy | The EU Taxonomy is an important, but not exclusive, qualification route. All institutions also allow other strategies and investment types. Products must disclose the extent to which they use the Taxonomy. | Transition: all three accept 15% Taxonomy alignment as an alternative route to meeting the contribution criterion. Sustainable: the Commission and the Council also apply 15%, whereas the EP requires 20%. This percentage is therefore a clear point for negotiation. | |
| Product-level PAIs | For Transition and Sustainable, PAIs must be identified and explained, and the measures being taken must be specified. The indicators will be further specified by delegated act. | The Commission leaves the use of indicators largely flexible. For Transition and Sustainable, the Council requires at least three relevant indicators, with additional fossil fuel information for relevant Transition products. The EP is more prescriptive: for Transition, greenhouse gas emissions, fossil fuel exposure and at least one relevant indicator; for Sustainable, four specific indicators. Only the EP also introduces a PAI obligation for ESG Basics. | |
| Opt-out and grandfathering | All three institutions provide for arrangements for existing closed-ended products. | The Commission does not propose an opt-out for AIFs offered to professional investors. The Council and the EP do. The EP requires that no retail investor has access and that the choice and reasons are disclosed in pre-contractual information. The Council formulates the opt-out slightly differently and also includes Article 13(3). The Commission takes a broad approach to grandfathering: closed-ended products created and distributed before the date of application. The Council limits this to products that are closed to new investors and are no longer offered thereafter. The EP clarifies that existing contractual obligations and SFDR disclosures may continue to apply. | |
| Entry into force and transition | Entry into force: twenty days after publication. An additional period of twelve months is envisaged for IBIPs, pension products, pension schemes and PEPPs. | Commission: general application after 18 months. Council and EP: 24 months. The Council and the EP allow certain burden reductions to apply upon entry into force. The Council permits early application during the additional pension/insurance period and provides that, in the event of a deferral, the current SFDR and RTS continue to apply. | |
For a more detailed analysis, the Council has set out the positions of the Commission, the Council and the European Parliament side by side in a line-by-line overview.
What does this mean for the further negotiations?
The comparison primarily shows that the discussion is no longer about the fundamental structure of SFDR 2.0. The three product categories – Transition, ESG Basics and Sustainable – and the general 70% rule feature in all three positions. There is also broad support for simpler and more comparable product information and for stricter conditions on the use of sustainability-related product names and claims.
The main differences concern how strict the conditions within the categories should be. In particular, this concerns the permitted investments, the applicable exclusions, the role of PAI indicators and the conditions under which the 70% contribution criterion is deemed to have been met through an alternative qualification route.
Different emphases are also apparent here. In the Commission proposal, PAIs mainly play a role within the Transition and Sustainable categories. For these products, the principal adverse impacts of the investments must be identified and explained. The measures being taken to address these impacts must also be specified. However, the proposal does not prescribe which specific PAI indicators must be used, nor does it set a minimum number. ESG Basics, by contrast, is designed as a more accessible category for products that integrate sustainability factors without pursuing an explicit transition or sustainability objective.
In addition, the Council allows more scope within the Transition category, subject to conditions, for investments in companies with revenue from fossil fuel activities. In return, the Council sets out the PAI obligations for Transition and Sustainable products in more concrete terms. At least three relevant PAI indicators must be used for these products. Where a Transition product invests in certain companies engaged in fossil fuel activities, a separate indicator for exposure to the fossil fuel sector must also be applied.
Parliament’s negotiating mandate opts for product-specific PAI obligations within all three categories. For Transition, indicators for greenhouse gas emissions and fossil fuel exposure are mandatory, supplemented by at least one other relevant indicator. For Sustainable, indicators must also be used for adverse impacts on biodiversity-sensitive areas and for the absence of processes to monitor compliance with the UNGPs and the OECD Guidelines. For ESG Basics, the indicator for fossil fuel exposure is mandatory in any event. Parliament thus goes further than the Council, which does not propose a separate product-level PAI obligation for ESG Basics.
There is also a difference regarding Taxonomy alignment. The Commission and the Council apply a threshold of 15% for both Transition and Sustainable. When this threshold is reached, the 70% contribution criterion for the relevant category is deemed to have been met; the other category conditions continue to apply in full. In Parliament’s negotiating mandate, the threshold for Transition remains at 15%, but is increased to 20% for Sustainable.
Another important difference concerns the scope of the Sustainable category. The Commission and Parliament envisage products with environmental and social objectives, whereas the Council refers to environmental and/or social objectives. The Council’s mandate thus provides clearer scope for products that pursue solely an environmental or solely a social objective.
The treatment of products that combine different categories, known as blends, has not yet been fully settled either. The Council introduces an explicit hierarchy: a combination of Sustainable and Transition is classified as Transition, while a combination that includes ESG Basics falls under ESG Basics. The Commission proposal and Parliament’s mandate do not contain this explicit hierarchy.
For uncategorised products, only limited scope remains to voluntarily provide information on the integration of sustainability factors. This information must remain subordinate to the presentation of the investment strategy and must not amount to a claim reserved for one of the three categories. The Council and Parliament each attach a disclaimer concerning the absence of categorisation, but use different wording.
The central trade-off for the trilogue negotiations is thus becoming increasingly clear: how much flexibility can the new system offer without undermining product comparability and protection against greenwashing? The outcome will determine how accessible the three categories will be in practice and which obligations financial market participants must attach to them.
Outlook
The Council and the European Parliament now have negotiating mandates. The trilogue negotiations can therefore begin. These are expected to focus primarily on the mandatory PAI indicators, the Taxonomy thresholds, the treatment of fossil fuel investments, the definition of the scope of the Sustainable category, the categorisation of blends and the position of uncategorised products.
The main trade-off is how much flexibility and burden reduction the new system can offer without undermining product comparability and protection against greenwashing. The final criteria must prevent the three product categories from once again being interpreted differently in practice and consequently taking on the character of labels that are difficult to compare.
Even after an agreement on the Level 1 Regulation, SFDR 2.0 will not yet be fully developed. A significant proportion of the criteria, indicators, calculation methods and disclosure requirements will then need to be specified further in Level 2 legislation.
The period before application has not yet been established either. The Commission proposes a period of 18 months after entry into force, whereas the Council and the European Parliament envisage 24 months. An additional period of twelve months is also envisaged for certain insurance and pension products. Given the remaining negotiations and the proposed transitional periods, application of the new regime seems likely in 2028 at the earliest, but probably not until 2029.
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