On 24 June, the Council of the European Union adopted its negotiating position on the revision of the Sustainable Finance Disclosure Regulation — the framework that governs how financial products marketed as sustainable or responsible are labelled, disclosed, and classified in European markets. The Council's position broadly supports the Commission's three-category structure: sustainable, transition, and ESG basics. On one critical question, however, it diverges sharply from what the Commission proposed: the fossil fuel exclusion. The Commission's original draft would have barred companies expanding fossil fuel activities from the transition category altogether. The Council has deleted that exclusion.
Under the Council's position, a company actively opening new oil and gas fields may still qualify for a transition fund label. The conditions are specific but limited: roughly 20% of the company's capital expenditure must be aligned with the EU taxonomy of green activities, and the company must adopt a time-bound plan to reduce its operational emissions. There is a significant gap in that second condition. The emissions reduction plan covers Scope 1 — the company's own operational emissions — and Scope 2 — the emissions from the energy it buys. It does not cover Scope 3: the emissions produced when customers burn the oil and gas the company extracted. For oil and gas majors, Scope 3 typically represents 80 to 90 percent of total lifecycle emissions. A transition label that excludes the largest source of emissions from its qualifying conditions is, in the view of many market participants, a label that describes something different from what the word transition implies.
The Council's position is a negotiating mandate, not a final outcome. The European Parliament now has its own vote to cast. The economic affairs committee — the ECON committee — is scheduled to vote on its position on 15 July, with the full Parliament expected to adopt its stance after the summer recess. Following that, trilogue negotiations between the Parliament, the Council, and the Commission will determine the final text of SFDR 2.0. The Commission has said it remains committed to a balanced and timely outcome, but has not explicitly stated that it will defend the original fossil fuel exclusion in those negotiations.
The stakes are significant for the integrity of the transition fund category. The transition label was designed to direct capital toward companies that are genuinely decarbonising — entities that are not yet fully sustainable but are moving in a credible direction. If the category can be accessed by companies with plans that cover only a fraction of their total emissions footprint, the label risks becoming a commercial instrument rather than a climate signal. For asset managers who have built transition-labelled strategies — or who are marketing funds under SFDR's existing Article 8 or Article 9 categories — the final shape of the SFDR 2.0 transition category will determine whether their fund documentation remains accurate and defensible.
The 15 July ECON vote is the moment at which the Parliament defines its position before the summer. It is the most important near-term vote in European sustainable finance regulation, and its direction will signal whether the EU's two largest co-legislators are prepared to land on a common position that preserves or weakens the transition category's credibility. The direction Europe takes will shape sustainable fund labelling across the continent for a decade.
Sources: EU Council lets oil expansion qualify for sustainable funds Council agrees position on SFDR — consilium.europa.eu regulationtomorrow.com SFDR analysis