Why the Council's Mandate on SFDR 2.0 is a Huge Step Backwards

Whereas the Parliament's draft report acknowledged and closed the loopholes we flagged in our analysis of the Commission’s November proposal, the Council is reopening them.

The Council mandate falls short in five key areas:

• A brand-new opt-out for professional investors. Neither the Commission nor the Parliament include this. The Council lets Alternative Investment Fund (AIF) managers skip the entire categorisation regime for funds marketed exclusively to professional investors — a new carve-out that could take a meaningful slice of the sustainable investment market completely outside the framework.

• Fossil fuel expansion exclusion diluted. The Commission and the Parliament both exclude Transition-category investment in companies developing new fossil fuel projects. The Council swaps this for a much weaker test — 20% CAPEX to Taxonomy-aligned activities plus any Paris-compatible GHG strategy, with no bar on new fossil fuel development at all. The equivalent Sustainable-category exclusion stays intact. This would result in drastically laxer requirements for companies, effectively allowing them to continue investing in environmentally damaging projects whilst still meeting the criteria for the Transition category.

• Benchmark safe harbour is back. The Parliament removed it; the Council restores it for the Transition and Sustainable categories — benchmark-tracking products are again deemed automatically compliant, regardless of the benchmark's actual ambition.  This lets products skip individual verification against each category's substantive criteria simply by tracking a benchmark whose own minimum standards are considerably weaker — for example, still permitting products in the Transition category investment in fossil fuel companies, subject only to modest year-on-year decarbonisation.  

• Taxonomy-alignment threshold stuck at 15%. Although the Parliament raised it to 20% given current market practice, the Council has kept it to 15%, with a review pushed from 3 to 5 years. Keeping the bar this low lets products claim the Transition or Sustainable label without meaningfully increasing real Taxonomy-aligned investment, blunting the incentive for funds to raise their ambition as the market matures.

• Open-ended positive-screening criteria untouched. In striking contrast to the Parliament tightening the justification requirements for vague, self-defined sustainability criteria, the Council is silent on this issue. If the Council's position goes through in the Trilogue negotiations, this will allow financial market participants to continue assessing the positive impacts of products based on their own subjective criteria, potentially undermining the comparability and integrity of these assessments.

Nonetheless, the Council position still holds the line in certain respects, such as maintaining the non-categorised product disclaimer, as well as the mandatory core Principle Adverse Impact (PAI) indicators, although now only requiring the three PAIs most relevant for the product. The details are left for Level 2 legislation to determine.

In addition, a systemic gap remains with entity-level SFDR disclosures being out of scope across the Commission, Parliament and Council positions. Combined with a possible CSRD/ESRS exemption for asset managers, large parts of the investment sector risk escaping meaningful sustainability reporting altogether.

Looking ahead

The Parliament's ECON committee will vote on the Parliament's official position on 15 July, with a plenary vote expected in September. Trilogue negotiations are set to open in Q4 2026, with Level 1 agreement targeted by year-end — followed by Level 2 technical standards developed with ESMA.