A new chapter for SFDR
The EU Council has agreed its negotiating position on a refreshed transparency framework for sustainable financial products, a major milestone in the ongoing reform of the Sustainable Finance Disclosure Regulation (SFDR). The Council’s stance is designed to simplify disclosures, strengthen safeguards against greenwashing, and make sustainability information more usable for investors across the EU.
SFDR has been a central pillar of the EU’s sustainable finance architecture, but its implementation has exposed significant shortcomings. The Article 6/8/9 structure proved both influential and confusing, and market participants repeatedly called for clearer, more intuitive categories and more proportionate obligations.
From Article 6/8/9 to three clearer product types
At the heart of the Council’s position is a shift from the current Article 6, 8 and 9 references to a new set of three product categories. The intention is to move towards label‑like terminology that better captures investors’ expectations and reduces misuse of labels.
The three categories proposed are:
Sustainable products – products that demonstrably focus on sustainable economic activities or objectives, aligned with clearly defined sustainability criteria.
Transition products – products that allocate capital to companies or projects that are not yet sustainable but are on a credible transition pathway, including alignment with EU climate and environmental goals.
ESG basics products – products that integrate environmental, social and governance factors but do not meet the higher bar required to be classified as sustainable or transition products.
This restructuring responds directly to criticisms that the Article 8/9 framework was too open to interpretation and allowed for inconsistent market practice. It is meant to help investors distinguish between basic ESG integration, transition strategies, and sustainability‑oriented products at a glance.
Tackling greenwashing with stronger safeguards
Greenwashing concerns lie at the centre of the reform. The Council’s position seeks to ensure that the new categories are backed by credible, data‑driven safeguards, rather than simply re‑branded marketing labels.
Key safeguards include:
Enhanced use of principal adverse impact (PAI) indicators for products in the sustainable and transition categories, to ensure better visibility of negative externalities.
A requirement to use a minimum number of mandatory PAI indicators selected from the European Commission’s list, reducing the scope for cherry‑picking metrics.
Clearer expectations for how sustainability risks and adverse impacts are integrated into investment decisions, building on the existing SFDR entity‑ and product‑level framework.
The logic is straightforward: if a product is marketed as sustainable or transition‑focused, investors should be able to see not only its positive ambition but also its material adverse effects, quantified using a common indicator set.
Fossil fuels, transition finance and the EU Taxonomy
A particularly sensitive topic has been how transition products can engage with fossil fuel companies, given their role in current energy systems and emissions profiles. The Council’s position allows some conditional inclusion of such companies, but with strong constraints linked to the EU Taxonomy.
In practice, this means:
Fossil fuel companies can appear in transition products only if they devote a significant share of capital expenditure to Taxonomy‑aligned activities above a defined threshold.
They must also present credible, time‑bound transition plans consistent with EU climate objectives, with progress subject to disclosure and scrutiny.
A dedicated PAI indicator is envisaged to capture the adverse impacts of exposures to such companies, increasing transparency for investors.
This approach reflects an attempt to balance realism with ambition: recognising that a net‑zero transition cannot ignore incumbent high‑emitting sectors, while still setting a high bar for how such exposures are justified and monitored.
Proportionality and professional investors
Another important aspect of the Council’s position is an effort to calibrate obligations according to the target investor base. The proposal envisages a lighter regime for products marketed only to professional investors, who are assumed to have the capacity and bargaining power to obtain more tailored information.
For example, certain alternative investment funds sold exclusively to professional clients could be exempt from the full product categorisation framework. The goal is to avoid a one‑size‑fits‑all model that burdens sophisticated investors with retail‑style labelling requirements, while maintaining robust protections for non‑professional clients.
Implications for EU‑focused market participants
For asset managers and product manufacturers inside or active in the EU, the Council’s position, if reflected in the final legislation, will trigger significant work:
Existing product line‑ups will need to be mapped to the new categories, and many funds currently positioned as Article 8 or 9 strategies will have to demonstrate how they meet the criteria for “sustainable” or “transition” labels.
Investment strategies with material fossil fuel exposures will require careful justification, especially if they aim to sit in the transition category under the proposed Taxonomy‑linked tests.
Data architecture and reporting processes must be upgraded to capture the required PAI indicators and any additional sustainability metrics, particularly for products with higher sustainability ambition.
For distributors and advisors, the implications are equally significant:
Client‑facing documentation, suitability questionnaires, and advisory tools will need to be reworked to explain the new categories in clear, accessible language.
Over time, the simpler categories should support better matching between client sustainability preferences and product selection, particularly in retail distribution channels.
For investors, the promised benefits include clearer differentiation between basic ESG integration, transition‑oriented strategies and genuinely sustainable products, as well as more transparent information on adverse impacts and fossil fuel exposures.
A UK lens: what this means for London‑based managers
Although the UK has left the EU and is developing its own Sustainability Disclosure Requirements (SDR), SFDR remains highly relevant for UK‑based firms that market funds into the EU. Non‑EU asset managers using national private placement regimes (NPPRs) or other cross‑border channels are typically expected by EU regulators and investors to align with SFDR for products offered in the bloc.
For London‑based and wider UK managers, the Council’s position on a revamped SFDR framework implies several practical consequences:
Dual alignment challenge: firms will need to navigate both UK SDR and the evolving SFDR regime, ensuring that product classifications and sustainability narratives are coherent across jurisdictions, even if labels differ.
Re‑labelling for EU distribution: funds currently marketed as Article 8/9 products in the EU will likely have to be re‑positioned under the new sustainable, transition or ESG basics categories, with supporting evidence to satisfy EU due diligence and distribution partners.
Data and PAI readiness: UK firms that have already built systems to report SFDR PAIs will need to adapt those capabilities to the revised indicator set and any new minimum requirements emerging from the reform.
AIFMD2 and NPPR context: changes under AIFMD2, including tighter conditions on non‑EU managers’ access to EU investors via NPPRs, sit alongside SFDR reforms and raise the bar on governance, disclosure and supervision for London‑based alternative managers targeting the EU market.
At a strategic level, this means UK firms cannot treat SFDR reforms as a purely “EU issue”. For managers with a meaningful European investor base, the new categories and disclosure expectations will shape product architecture, marketing strategy, and the way sustainability stories are told from London into the continent.
Next steps in the legislative process
The Council’s agreement sets its mandate for negotiations with the European Parliament, which will adopt its own position before interinstitutional “trilogue” talks begin. Many details—such as the exact criteria for each category, the final list and thresholds for mandatory indicators, and the treatment of specific sectors—will be settled in those discussions.
This process is also informed by the European Commission’s broader review of SFDR, culminating in its November 2025 proposal to simplify and rationalise sustainability disclosures. The overarching objective is to align SFDR more closely with the EU Taxonomy, corporate sustainability reporting rules, and other elements of the EU’s sustainable finance toolkit.
Why this matters for BSustainable.Today readers
For sustainability professionals, investors, and policymakers, this Council position signals a decisive shift in the EU’s regulatory approach: from a dense, sometimes ambiguous framework towards a more user‑friendly, label‑like system that still rests on robust data and governance requirements.
For a London‑based audience, the message is equally clear: even as the UK pursues its own regulatory path, SFDR’s evolution will continue to shape the competitive, compliance and reputational landscape for any firm raising capital from EU clients. The coming months of negotiation will determine the final contours of the regime—but the direction of travel towards clearer categories, stronger anti‑greenwashing safeguards, and closer alignment with the EU Taxonomy is already firmly set.