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The European Parliament's Economic and Monetary Affairs Committee (ECON) has adopted its position on the review of the Sustainable Finance Disclosure Regulation (SFDR), marking another significant step towards what many market participants are already referring to as "SFDR 2.0". While the committee has addressed several weaknesses in the European Commission's original proposal, important issues remain unresolved and will now move into trilogue negotiations between Parliament, Council and Commission.
For investors, asset managers and stewardship professionals, the latest developments are a reminder that the future shape of Europe's sustainable investment framework remains very much under debate.
The ECON position introduces a number of enhancements that many sustainable finance stakeholders are likely to welcome.
These include stronger product-level Principal Adverse Impact (PAI) indicators, the restoration of certain entity-level disclosures, and clearer disclaimers for products that are not formally classified under the SFDR regime but nevertheless contain sustainability-related information.
Collectively, these measures seek to improve transparency and reduce the risk that investors receive inconsistent or incomplete sustainability information when comparing financial products.
This reflects a broader regulatory trend across Europe: moving away from broad sustainability marketing claims towards more structured, evidence-based disclosure frameworks.
One of the most debated aspects of the ECON proposal is its support for an opt-out mechanism for Alternative Investment Funds marketed exclusively to professional investors. This approach broadly mirrors a position already advanced by the Council.
While the policy rationale is clear, professional investors are generally assumed to possess greater resources, expertise and due diligence capabilities than retail investors. However, the proposal raises an important question: should access to sustainability disclosures be determined only by investor sophistication?
Critics argue that reducing disclosure obligations may fragment the market and create information gaps precisely where some of the largest pools of capital operate. They also note that many professional investors, including pension funds and insurance companies, increasingly rely on sustainability information as part of their fiduciary oversight, stewardship activities and reporting obligations.
Recognising these concerns, the ECON proposal includes a safeguard preventing exempted products from using sustainability-related terminology in marketing material and product names. Whether this safeguard proves sufficient is likely to become an important topic during trilogue discussions.
Perhaps the most politically sensitive issue concerns the proposed criteria for products classified within the new "transition" category.
Under the ECON approach, companies could remain eligible even where fossil-fuel expansion activities continue, provided certain conditions are met, including minimum levels of Taxonomy-aligned capital expenditure and plans to reduce operational greenhouse gas emissions. Additional safeguards would require companies to invest more in Taxonomy-aligned activities than in fossil-fuel expansion and, where coal-based power generation is involved, to phase out those activities.
That debate goes to the heart of sustainable finance policy.
Should transition finance focus primarily on incremental improvement and capital allocation signals? Or should eligibility depend on evidence that a company is genuinely transforming its underlying business model?
The answer matters because investors increasingly use regulatory classifications to distinguish between companies that are adapting to a low-carbon economy and those that are simply undertaking isolated sustainability projects while maintaining fundamentally unchanged strategic trajectories.
The credibility of any future transition category will therefore depend not only on technical thresholds but also on whether investors view the framework as an effective indicator of genuine change.
Another issue highlighted during the review is the challenge of applying a single sustainability framework across diverse asset classes.
The ECON text, like the Council's position, does not currently include specific criteria tailored to different asset classes such as private markets or real assets. It also does not introduce dedicated criteria for products pursuing social objectives.
From an investor perspective, this remains a significant gap.
Private equity, infrastructure, real estate and other private market investments often exhibit fundamentally different characteristics from listed securities. Applying identical disclosure tests can generate inconsistencies, limit comparability and create practical implementation challenges.
Future technical standards may ultimately provide a more tailored approach, but many market participants are likely to seek greater clarity before the revised regime becomes operational.
A further unresolved issue is the omission of the "Do No Significant Harm" (DNSH) principle from the proposed sustainable category.
DNSH has become one of the foundational concepts underpinning the EU sustainable finance architecture. Its purpose is straightforward: an activity or investment should not be regarded as sustainable if it causes significant harm to other environmental or social objectives.
Supporters of DNSH view it as an essential safeguard against greenwashing and a key contributor to market credibility. Opponents argue that implementation has sometimes been complex, resource-intensive and difficult to apply consistently across sectors.
The outcome of this debate will have significant implications for how sustainability claims are interpreted across European financial markets.
The next major milestone is expected in October, when the European Parliament is scheduled to consider the ECON position in plenary session. Trilogue negotiations between Parliament, Council and Commission are expected to begin shortly thereafter.
For investors and stewardship teams, the direction of travel remains clear: the EU continues to refine its sustainable finance framework while seeking a balance between usability, market integrity and investor protection.
Yet the final shape of SFDR 2.0 remains undecided.
The coming trilogue negotiations will determine whether policymakers can reconcile competing views on transition finance, disclosure obligations, social objectives and sustainability safeguards while preserving confidence in one of the most influential sustainable investment frameworks globally.
For asset owners and investment managers, the most important question is not whether disclosures become more extensive or less extensive, but whether they remain decision-useful.
A sustainable finance framework only succeeds if it enables investors to make meaningful distinctions between products, strategies and issuers. As negotiations continue, maintaining clarity, comparability and credibility should remain the central objectives.
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