The Sustainable Finance Disclosure Regulation has been the EU’s primary transparency framework for sustainable investment products since 2021, and it has also been one of its most contested. The Article 6, 8, and 9 structure that defined the market for five years was neither as clear as it needed to be nor as greenwashing-proof as regulators intended. The EU Council has now agreed its position on a fundamental revision — and the direction of change is decisive enough to require action from any asset manager operating in, or distributing into, the EU.
The Council’s proposed framework replaces the Article 6/8/9 structure with three product categories. “Sustainable” products are those demonstrably focused on sustainable economic activities or objectives, aligned with clearly defined sustainability criteria. “Transition” products allocate capital to companies or projects not yet sustainable but on a credible transition pathway, including alignment with EU climate and environmental goals. “ESG basics” products integrate environmental, social and governance factors but do not meet the higher bar required for the other two categories. The logic is to move towards label-like terminology that better reflects investor expectations and reduces the scope for inconsistent market practice that made the Article 8/9 architecture so contentious.
The fossil fuel question — persistent throughout the reform debate — has been addressed through a conditional inclusion mechanism. Fossil fuel companies can qualify for the “transition” category, but only if they direct at least 20% of capital expenditure to activities aligned with the EU Taxonomy and present a credible, time-bound plan to reduce Scope 1 and Scope 2 emissions. Certain alternative investment funds sold exclusively to professional investors would be exempt from the categorisation rules entirely, reflecting the Council’s intent to calibrate obligations to the sophistication of the investor base. The European Parliament’s ECON Committee is expected to vote on its own position in July, after which trilogue negotiations will determine the final text.
For asset managers, the practical implications arrive before the legislation is finalised. Existing product ranges will need to be mapped to the new categories, and many funds currently positioned as Article 8 or Article 9 strategies will need to demonstrate how they meet the criteria for “sustainable” or “transition” labels with supporting evidence, not just a category designation. Transition strategies with material fossil fuel exposures face the most work: the 20% capex threshold and the requirement for a credible emissions-reduction plan represent a meaningful bar, and funds that cannot meet it will need to reclassify or restructure.
The broader signal from the Council’s position is a shift in regulatory philosophy. The EU is moving from a framework that depended heavily on product-level self-classification — where the burden of interpretation fell largely on market participants — toward one where categories carry defined criteria and where the regulator expects those criteria to be evidenced. For firms that have treated SFDR compliance as primarily a disclosure exercise, that shift will require a recalibration of how sustainability is built into the product design process itself, not just the documentation that describes it.
Sources: EU advances 3-label overhaul — Yahoo Finance Green Finance or Financing Green — Bruegel