EU: SFDR 2.0 moves one step closer to trilogues as Council agrees its negotiating mandate

In the next stage on the journey of SFDR 2.0 through the EU legislative process, on 24 June 2026, the  Council of the EU formally agreed its negotiating mandate. 

Overall, the Council has welcomed the proposed changes to the SFDR, recognising that the current framework needs clarity, consistency and alignment with other EU sustainable finance efforts and the expectations of markets.  In substance, therefore, the Council preserves the new product categorisation framework, and instead proposes targeted calibrations on four main points:

• PAI indicators: For products in the sustainable and transition categories, disclosure of principal adverse impacts is a qualifying condition.  The Council proposes that it will be mandatory to use at least three indicators from a list to be set by the European Commission to support their claims. This is primarily a comparability fix, given that the current framework has been criticised for allowing too much discretion in how PAIs are reported.  It should provide a more consistent basis and therefore make it easier for investors to compare products across the market.     
• Fossil-fuel exposures: the Council mandate clarifies that companies in the fossil fuel sector are not automatically locked out of the transition category. The mandate sets a specific carve-in, whereby companies allocating at least 20% of capex to EU taxonomy-aligned activities and with a credible, time-bound decarbonisation strategy can qualify. A fourth mandatory PAI indicator applies to these exposures on top of the baseline three. This ultimately means that inclusion comes with extra requirements to disclose the proportion of investments in companies active in the fossil fuel sector.
• Public-sector issuances: the Council proposes that general-purpose bonds issued by EU-established public bodies can explicitly qualify for the transition category under specific conditions (particularly relevant for insurance and pension products, which represent a significant share of the investment universe) . The rationale is that EU-level climate and sustainability commitments provide a sufficient baseline against which to assess alignment. This logic does not extend to non-EU issuers, however.
• Phase-in period to reach 70% threshold: under the Commission draft, in order to qualify for one of the three ESG categories, products must among other conditions have at least 70% of the portfolio aligned with the ESG objective of transition/sustainability or (in certain cases) with the strategy to integrate sustainability factors.      There is recognition however that the full implementation of an investment strategy for a given financial product can take a certain period of time, especially for alternative or private assets – the drafting therefore contemplates the phase-in time being communicated in pre-contractual documents.  The Council proposes setting a time limit on any such ramp-up period – proposing that unless applicable sectoral legislation provides otherwise, it should not exceed three years.  From a practical perspective, this will impact different asset classes to a greater or lesser extent, and will warrant close attention as the proposals make their way through the trilogue process.
• AIF opt-out for professional investors: the Council mandate provides for managers of AIFs offered exclusively to professional investors to opt out of the categorisation requirements altogether. This is particularly key and  stakeholders will want to consider this carefully, and will no doubt be watching how negotiations develop here.  The premise is that sophisticated investors do not need the standardised retail-facing disclosures that the categorisation regime is built around, and requiring it adds cost without benefit (particularly given that clear, fair and not misleading market standards nevertheless continue to apply).  This exemption harks back to an early leaked draft of the SFDR 2.0 Commission proposals but did not make its way into the final Commission draft (and the European Parliament also did not comment upon it in its latest proposals).      Notwithstanding the potential cost and administrative benefits, there are other practical considerations that might limit the utility of this opt-out (and depending on their specific circumstances, certain funds may choose not to exercise it).  For example:
  • With increased focus on retailisation within the investment space (e.g. in the context of private assets), funds will need to give thought to whether the wider fund structure allows for non-professional investors – or perhaps where a fund is professional-only at the outset, whether it will at a later stage allow for a wider range of investors, or sit within a structure that allows for retail investors.
  • Certain professional limited partners (institutional investors, pension schemes and insurers for example) may nevertheless continue to require more standardised retail-facing disclosures for their own reporting/regulatory purposes.  Whilst it may be possible to make bespoke arrangements (which could no doubt be more flexible than the SFDR requirements), this will come with its own cost and practicality considerations, and could impact comparability and result in less harmonisation.

Next steps

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 plenary vote to follow in Q3 (date tbc). You can see our recent blog post on the latest Parliament proposal here.  Our commentary on the European Commission draft can be found here.

Provided no significant delays in Parliament, trilogue negotiations remain likely to start in early Q4 2026.

You can find the Council's position here and a press release here