The EU Council has agreed its position on a revised Sustainable Finance Disclosure Regulation, replacing the current framework with three product categories ahead of negotiations with the European Parliament. The aim is to improve clarity and comparability, but the trade-off between simplification and credibility remains unresolved.

As Cyprus finance minister Makis Keravnos put it, the changes should allow firms to “more clearly communicate sustainability efforts and gain investors’ trust”. Whether the proposal can deliver both is still an open question.

A structural reset

The proposal replaces the de facto labelling system built around Articles 6, 8 and 9 with three categories: “sustainable”, “transition” and “ESG basics”. This reflects a recognition that the existing framework has become inconsistent and difficult to use, particularly for retail investors.

By introducing clearer categories, the Council aims to separate disclosure from labelling while providing more usable signals to the market.

Simplification versus comparability

Products in the “sustainable” and “transition” categories would be required to report against at least three adverse impact indicators. This should improve comparability, although flexibility in indicator selection may still lead to variation in practice.

At the same time, the Council has prioritised reducing administrative burden, including an opt-out for products marketed only to professional investors. This highlights a key trade-off that simpler rules may reduce costs, but risk fragmenting transparency across the market.

Parliament signals a tougher stance

The Council’s position also needs to be read alongside signals from the European Parliament, including public correspondence and the rapporteur’s draft report published in May. These do not yet amount to Parliament’s official negotiating position, but they point to a more prescriptive and enforceable regime.

The draft report pushes for higher thresholds, fewer routes to qualification and stronger product-level disclosures. It also places greater emphasis on engagement, requiring firms to explain how stewardship supports sustainability objectives, rather than treating it as supporting narrative.

Taken together, this suggests a potential gap in approach. The Council is prioritising usability and flexibility. The draft Parliament approach is focused on tightening eligibility and reinforcing labels as a marker of substance. Trilogues will determine which of these priorities prevails.

The transition question

The “transition” category is central to the reset. It allows investment in high-emitting sectors, provided firms meet conditions such as allocating 20 percent of capital expenditure to taxonomy-aligned activities and having a credible emissions strategy.

This broadens the scope of sustainable finance to include more of the real economy. However, it also introduces judgement. What qualifies as a “credible” transition path is not clearly defined, and partial taxonomy alignment may not reflect a fundamental shift.

Credibility gaps

In a statement released this week, Eurosif welcomed the structure but flagged weaknesses. The absence of a “Do No Significant Harm” requirement in the sustainable category “remains a major concern”, according to chair Nathalie Dogniez, as it weakens a key safeguard.

Concerns also focus on limited social and governance criteria and the risk of inconsistency created by the professional investor opt-out.

The transition category is particularly contested. Eurosif’s Aleksandra Palinska warned that it must identify companies “genuinely moving onto a robust transition pathway”, adding that “an oil major that continues to develop new oil fields cannot credibly claim to be transitioning”.

What happens next

The next stage will focus on safeguards, disclosures and the treatment of transition assets. These details will determine whether the new framework is genuinely more comparable and credible.

The direction of travel is clear, but the endpoint is not. Council is now ready to enter trilogues once Parliament adopts its own position. In Parliament, the ECON committee vote is scheduled for 15 July, with a plenary vote expected in Q3, date to be confirmed. The success of SFDR 2.0 will depend on whether the final framework can balance usability with credibility.

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