SFDR 2.0 – Council of the EU negotiating position: Broadly welcome changes, but will they survive trilogue?

On 24 June 2026, the Council of the European Union (the "Council") published its agreed negotiating position on SFDR 2.0, with a substantially amended text containing changes that the Council considers will both simplify the existing rules and increase transparency. In this briefing, we provide a summary of the main points in the Commission's original SFDR 2.0 proposals and summarise key elements of the Council's proposed revised text.

Following the Council's position being settled, attention will now turn to the European Parliament, which will need to settle its own negotiating position before trilogue discussions begin between the Commission, Council and Parliament to agree a final text. Those trilogue discussions are expected to begin towards the end of 2026. Allowing for a period of negotiation, and given that the Council is proposing a 24-month implementation period (as opposed to the Commission's original 18-month proposed period), this implies a final implementation date for SFDR 2.0 at some point in mid- to late-2029, but this remains subject to legislative progress and potential amendments to the implementation timeline in the final agreed text.

As we flagged in our briefing at the time, the Commission's SFDR 2.0 proposal document suggested a fundamental re-plumbing of the existing SFDR architecture, including by:

• Deleting the existing product categorisation framework and introducing new product categories (including new names) and eligibility criteria and investment thresholds for sustainability-related products. The new categories were Article 7 "Transition" products, Article 8 "ESG Basics" products, and Article 9 "Sustainable" products, as well as a new Article 9a category for products which invest in or combine products falling within the other categories;
  
  
• Instituting new rules for products that do not fall within the new sustainability-related product categories above, governing the extent to which the marketing materials for such products can include information on whether, and how, the product considers sustainability-related factors (which we termed Article 6a products);
  
  
• Creating an exemption from the SFDR 2.0 framework for closed-ended funds which were no longer being distributed when the revised SFDR 2.0 rules took effect;
  
  
• Creating a 12-month transitional period to allow existing products to bring themselves into compliance with the new SFDR 2.0 product criteria, although this was not available to investment funds;
  
  
• Removing portfolio managers and advisers from the scope of SFDR, meaning that they would no longer need to produce SFDR disclosures or reports;
  
  
• Granting a power for the European Commission to specify in a delegated act further rules governing the phase-in period for the new Article 7, 8 or 9 products to meet the necessary investment thresholds; and
  
  
• Implementing certain other changes relating to reporting and information disclosure requirements.

Importantly, despite being contained in the leaked draft version, the Commission's published SFDR 2.0 proposal did not contain any proposed ability for professional-only funds to opt out of the SFDR framework.

In this section, we highlight some of the key elements of the Council's finalised negotiating position, although this is not intended to be an exhaustive summary.

AIF professional investor only opt-out

Probably the most eye-catching change in the Council's proposed SFDR 2.0 text is the reinstatement of an opt-out provision in connection with AIFs which are made available exclusively to MiFID per se professional clients, a form of which had originally appeared in a leaked draft of the Commission's initial SFDR 2.0 proposal but was subsequently dropped. (Broadly speaking, MiFID per se professionals are institutional investors, such as authorised financial market participants or larger corporates.)

Although this has understandably caught the attention of the industry press, as currently drafted the opt-out has several limitations. These include:

• The opt-out would apply only to AIFs. Therefore, to the extent that the relevant fund is an EU UCITS product (even if it is offered exclusively to professionals, as some are) or an investment insurance policy, the opt-out will not apply.
  
  
• The relevant AIF must be made available exclusively to MiFID per se professional clients. This means that AIFs which are marketed to MiFID elective professional clients cannot benefit from the opt-out. (MiFID elective professionals are investors who do not meet the MiFID per se criteria, but who meet certain technical conditions and have the necessary knowledge and understanding to be considered professionals. This can include some sophisticated individuals.) It seems likely that this is a deliberate policy choice and it may be intended as a compromise to meet concerns that we understand have been raised in the European Parliament and among certain Member States about marketing to elective professionals. Ultimately, this may discourage the marketing of AIFs that are not intended to be sustainability-related products to sophisticated, high-net-worth individuals and to other types of investors that do not satisfy the MiFID per se professional test. This may reduce the availability of some investment products for these types of investors in the EU.
  
  
• The opt-out would not result in a complete disapplication of SFDR. Instead, the new product categories and the rules in Article 6a about disclosures for non-sustainability-related products are disapplied, as is the prohibition on including sustainability-related claims in the product name of an Article 6a product. However, other requirements under SFDR 2.0 would continue to apply to the fund, such as the general requirements in Article 6 to describe in pre-contractual disclosures how sustainability-related risks are integrated into investment decisions.

While the professional investor opt-out may bring much needed flexibility to the regime, it is worth noting that some EU institutional investors will likely prioritise allocating investment capital to products that are categorised under the SFDR 2.0 framework.

We continue to believe that an exemption from the disclosure restrictions (subject only to a "fair, clear and not misleading" standard) for communications directed exclusively to professional investors (whether or not the relevant fund is categorised) would be a much better solution. This would allow open and transparent dialogue with institutional and sophisticated investors on sustainability matters, without discouraging private markets firms from adopting the new categories.

Exemption for fully raised closed-ended products

The Council is also proposing to maintain the Commission's original exemption from the SFDR framework for closed-ended funds which are fully raised before the SFDR 2.0 rules enter into effect. The wording of the exemption has been tweaked slightly (so that it is clear that a fund would need to be closed to new investors and no longer offered to any investors after that date) to benefit from the exemption, but the substance is essentially the same.

As we pointed out in our briefing on the original Commission proposal, this exemption appears to exempt the grandfathered fund from the entirety of the SFDR rules, and not just the SFDR 2.0 changes. This may be particularly helpful for certain existing closed-ended funds where the nature of the commitments made to existing investors and the approach adopted in existing investor disclosure documents could make transitioning to the new product framework particularly challenging.

Product categories, phase-in and names

The Council is not proposing any fundamental changes to the basic architecture of the Commission's proposed SFDR 2.0 product classification framework. The Council text therefore retains the three new "core" Article 7, 8 and 9 product categories and their names, as well as the rules in Article 6a for non-sustainability related products.

Retaining the contentious "ESG Basics" name may disappoint some market participants, given the widespread concerns that "ESG" may be a politically toxic term for some target investors and that "Basics" may imply a degree of simplicity and/or lower risk which may not properly reflect the nature of the product.

The Council would also maintain the Commission's proposed 70% minimum threshold of eligible investments linked to the sustainability objective of Article 7, 8 or 9 products, and the provisions stating that for Article 7 (Transition) or Article 9 (Sustainable) products, that threshold will be deemed to be met if the product has at least 15% of its portfolio in EU Taxonomy-aligned investments. Importantly, the Council's amended text recognises that this 70% threshold should be measured after an appropriate time-limited "ramp up" period (set at three years unless a longer period is permitted by sectoral legislation). This is a welcome clarification, as it recognises that private funds deploy capital over a staggered timeframe and will not be able to commit to 70% alignment on day one of their investment period. However, there is no equivalent recognition of divestment periods, and it is therefore not clear how the 70% threshold will apply to most private markets products, which divest assets over a relatively long period. Nonetheless, the Council is proposing that the Commission should be empowered to adopt a delegated act which, among other issues, could specify limited permitted deviations from the investment exclusions for Article 7, 8 or 9 products for the purposes of delayed divestment from illiquid assets. We continue to be of the view that for closed-ended private capital funds, alignment should be measured across a fund's entire lifespan based on, for example, original investment cost or capital deployed.

Article 6a: non-sustainability related products

The Council is proposing to retain the basic structure of the Article 6a product category. In effect, Article 6a provides that the pre-contractual documents for a product which does not fall within one of the Article 7, 8 or 9 classifications can still contain information on how the relevant product considers sustainability factors, but this is subject to meeting restrictive criteria. Those criteria include that the relevant sustainability information:

• is not a "central" element of the pre-contractual disclosures for the product. This means that the information must be presented in a way that is secondary to the presentation of the product's characteristics in terms of both breadth and positioning in the document, must be neutral, and must be limited to 10% of the volume of the overall information relating to the product's investment strategy;
  
  
• is not included in any PRIIPs KID or UCITS KIID relating to the product; and
  
  
• does not constitute a claim that falls within Article 7(1) (i.e. that the product invests in sustainable transition) or Article 9(1) (i.e. that the product invests in sustainable companies, activities or assets or otherwise contributes to sustainability).

However, the Council text has loosened the relevant restrictions somewhat, by deleting the Commission's previous prohibition on including information that would constitute a claim falling within Article 8(1). In practice, this means that a product provider would (subject to the limitations above) be able to include information about how it integrates sustainability factors into its investment strategy (going beyond merely explaining how it considers sustainability risks).

This may be an important concession because previously, there were concerns that if a product provider wanted to explain to investors the extent to which sustainability formed part of its investment approach (as opposed to merely how it took account of sustainability risks), this would necessarily force it into at least the Article 8 ESG Basics category. If the Council's position is adopted, it would be possible for funds to include a limited discussion of how sustainability factors form part of the investment strategy without needing to comply with the core Article 7, 8 or 9 product rules. Nonetheless, there are likely to be continuing concerns about the practicalities of limiting the discussion of sustainability factors to a mere 10% of the discussion of the product's investment strategy and how to ensure the required "neutrality" and "secondary positioning".

The Council would also require the relevant product documentation to include the following standardised disclaimer: "This financial product does not meet the minimum criteria to qualify as a sustainability-related financial product under European Union law". The industry may welcome this clarification about the requisite form of wording to make it clear to investors that the product is not intended to be marketed as an Article 7, 8 or 9 product.

Private assets as eligible investments across Article 7, 8 and 9 products

We have previously discussed our concern that the Commission's SFDR 2.0 proposal failed adequately to cater for the nature of investing in private markets. In particular, we believe that SFDR 2.0 fails to recognise the value of private markets-style engagement where private funds seek to drive positive sustainability-related change through proactive engagement. There has been some movement on this front – though our core concerns remain.

The Council has added new definitions of "private assets" and "real assets" to the SFDR 2.0 text. In this context a "private asset" is defined as:

• an equity or quasi-equity instrument as defined in the ELTIF Regulation, where the instrument is not admitted to trading on a regulated market or MTF at the time that the initial investment is made; or
  
  
• loans granted to an undertaking by the relevant fund/other product subject to SFDR.

A "real asset" also has the definition from the ELTIF Regulation, being an asset with intrinsic value due to its substance or properties (e.g. real estate, infrastructure, aircraft, machinery, etc.).

The Council is proposing that the provisions governing eligible investments for each of the Article 7, 8 and 9 product types should be updated to clarify the eligibility of private or real assets when they form part of the residual class of "other investments" for each product type that contributes towards the product's sustainability objective. In particular, the Council proposes that the following can be demonstrated through documented, asset-class appropriate evidence and methodologies included in the required investor disclosures for the product:

• for Article 7 (Transition) products, the credible contribution to the transition;
  
  
• for Article 8 (ESG Basics) products, the integration of sustainability factors and, where relevant, the proven positive track record in terms of processes, performance or outcomes related to sustainability factors; and
  
  
• for Article 9 (Sustainable) products, the contribution to the environmental or social objective.  

The proposed text still lacks clarity on precisely what would constitute "asset-class appropriate evidence and methodologies" in this context, so if this change is adopted, firms may need to look out for further regulatory guidance or emerging market practice on this point.

Article 7: Transition products

The Council has deleted the Commission's original exclusion which would have prevented Article 7 (Transition) products from investing in companies deriving 1% or more of their revenues from exploration, mining, extraction or distribution of hard coal or lignite.

Instead, there is a revised exclusion prohibiting investment in companies which derive any revenues from exploration, extraction, mining or refining of hard coal, lignite, oil fuels or gaseous fuels, except where those companies:

• allocate at least 20% of their total capital expenditures to EU Taxonomy-aligned economic activities; and
  
  
• have in place a time-bound and measurable strategy to reduce Scope 1 and 2 greenhouse gas emissions which is compatible with the target in the Paris Agreement.

In practice, this introduces more flexibility for Article 7 products to invest in companies deriving more than minimal revenues from fossil fuel related activities, even with the newly-introduced conditions for such investments. The Taxonomy capex requirement will not guarantee diversion of investment from fossil fuels into alternative energies (as it can be satisfied by allocating capex to unrelated Taxonomy-aligned activities) and the obligation to reduce operational greenhouse gas emissions ignores the fact that operational emissions are dwarfed by scope 3 emissions when fossil fuels are burned. The Council's amendments may well prove controversial with the left leaning parties in the European Parliament.

The Council has also proposed amending the list of eligible investment types for Article 7 products, so that, broadly:

• The eligible investments to meet the minimum sustainability threshold will include European green bonds, and general purpose issuances by EU public sector bodies where the product provider can demonstrate based on "formalised and documented methodologies" that the investment is aligned with the transition-related objectives of the product and these represent no more than 15% of the portfolio.
  
  
• The excluded investments list will carve out use of proceeds instruments (e.g. bonds or loans issued for a specific purpose) issued by companies where the proceeds do not fund activities in prohibited weapons or tobacco or fossil fuel-related activities, provided that the issuing company is not in violation of the UN Global Compact principles or the OECD Guidelines for Multinational Enterprises. This means that a product would not automatically fall outside of Article 7 simply because it may include within its portfolio some corporate bonds which are issued to fund non-transition-related activities.

Article 7 product providers will still need to disclose information on the principal adverse impacts (PAIs) of their investments on sustainability factors and the action they are taking to address such impacts. However, importantly, the Council is now proposing that when doing so, the provider must use at least three PAI indicators from a list in a delegated act that will be adopted by the Commission which are most relevant to the transition-related objectives of the product. If there are no relevant indicators in the list, the provider will be able to use alternative indicators.

Article 8: ESG Basics products

In a similar way to Article 7 products above, the Council is proposing that eligible investments to meet the minimum sustainability threshold may include investments in general purpose debt issuances by public sector bodies, provided that:

• the product provider has assessed whether those investments integrate sustainability factors using a formalised and documented methodology; and
  
  
• the investments are in line with the sustainability-related claims that the product provider has made about the Article 8 product.

Other eligible investments will continue to include, among others, investments outperforming the average investment universe or reference benchmark, but these will now need to outperform at least two specific appropriate sustainability indicators (rather than a single indicator, as the Commission had proposed).

The Commission had previously proposed that another eligible investment category would have been investments favouring undertakings or economic activities with a proven positive track record in terms of processes, performance or outcomes related to sustainability factors. The Council is proposing to delete this, possibly due to concerns that this category was too vague to provide transparency and assurances to investors.

Article 9: Sustainable products

The Council is proposing that when an Article 9 product provider is disclosing PAIs, it must use at least three indicators specified in Commission delegated acts which are most relevant to the sustainability-related objectives of the product. If none of the indicators are relevant to the product, then the product provider will be able to use alternative sustainability-related indicators instead.

As with Article 7 products, the Council proposes that eligible investments contributing towards the minimum sustainable investments threshold for Article 9 products should include European green bonds and use of proceeds issuances by public sector bodies where those issuances meet certain conditions.

The Council has also amended a recital to SFDR 2.0 to state that Article 9 should not only capture funds that pursue strategies that replicate or are managed by reference to the EU Paris-aligned benchmarks or invest in EU Taxonomy-aligned investments but also other strategies investing in "comparable assets to these standards", for example similar sustainability standards or taxonomies developed by non-EU countries or established market-led initiatives, provided that the product provider discloses and justifies the relevant sustainability standard. This clarification is particularly helpful for private funds that pursue a global investment strategy and invest in assets outside the EU (which are not subject to EU sustainability related legislation).

Article 9a: products investing in or combining sustainability-related products

The original Commission proposal contained provisions in Article 9a which, while not being straightforward to interpret, appeared to be aimed at defining when a product which itself invests in other sustainable products or combines them into a new product could be marketed as a sustainable product in its own right. This seemed designed to be a framework for classification of products such as funds of funds or structured products.

The Council's proposed text seeks to clarify how this will work in practice. Broadly speaking, a product that invests in or combines other sustainability-related products will itself be deemed to be a sustainability-related product if:

• it meets the relevant investment threshold for an Article 7, 8 or 9 product by way of investment in eligible assets under those provisions; and
  
  
• it complies with the relevant exclusions in Article 7, 8 or 9 which prohibit investment in certain assets.

The Council has also sought to clarify which product category (i.e. Article 7, 8 or 9) the relevant fund-of-funds or combination product falls within, on the following basis:

• If the product invests in or combines underlying financial products which are Article 9 (Sustainable) products, then it can itself be classified as an Article 9 product.
  
  
• If the product invests in or combines underlying products which are Article 7 (Transition) products or invests in Article 9 products alongside Article 7 products, then it can be classified as an Article 7 product.
  
  
• If the product invests in or combines underlying products which are Article 8 (ESG Basics) products, whether alone or alongside Article 7 and 9 products, it can be classified as an Article 8 product.

Any claims made in relation to the fund-of-funds or combination product must then align with the classification determined by the above rules. In practice, this "lowest common denominator"-type approach would appear to make sense and provides a clearer framework than the Commission's original drafting.

Where the product provider has engaged an authorised EU portfolio manager to manage a portfolio in accordance with the requirements of Article 7, 8 or 9, the provider will be entitled to rely on information provided by the portfolio manager when determining whether the product meets the conditions to be classified as a sustainability-related product under the Article 9a framework.

The Council is also seeking to clarify the approach that should apply to insurance-based investment products, pension products, and AIF and EU UCITS funds-of-funds which, in each case, are non-sustainability related products under Article 6a (see above) but which claim to invest in sustainability-related products or relevant eligible investments under Articles 7, 8 or 9. In that situation, the pre-contractual disclosures for the product must include the following information:

• the relative share and underlying composition of the product that is invested in sustainability-related products or eligible investments and the share that is not;
  
  
• the objective, strategy and any investment exclusions that apply to the share of the product that is not invested in sustainability-related products or eligible investments; and
  
  
• if the product is classified as a PRIIP and offers investment options, a list of the options available and information about their categorisation under the SFDR framework and, for sustainability-related products, further disclosures relevant to the product category. For an Article 6a non-sustainability related product, if providing information about the options would exceed the 10% volume limit permitted in the investment strategy disclosures, the product provider would be permitted to disclose information through weblinks or other cross-references.

As noted above, the European Parliament's negotiating position is yet to be settled and will be the final piece of the puzzle before the three EU institutions enter into the (largely opaque) trilogue process to thrash out the details of the final text. Although the Parliament's influential ECON Committee has published a draft report on SFDR 2.0, the Parliament in plenary will need to approve its formal negotiating mandate, which is expected to occur over the summer.

The length of the subsequent trilogue process is difficult to predict and depends on the differences in the positions between the institutions. However, as we explained in the introduction, allowing for a process lasting several months, and assuming that the Council's proposed 2-year implementation period is adopted, it now seems unlikely that the SFDR 2.0 framework would take effect before mid- to late-2029 at the earliest.