EU Council overhauls sustainability rules to reshape financial product labels

The EU Council has agreed on its negotiating position for a revised sustainability transparency framework. The move aims to reshape how financial products are labelled and compared across Europe. It targets changes to the Sustainable Finance Disclosure Regulation (SFDR). The Council-backed framework introduces three new categories for financial products. These are 'sustainable', 'transition', and 'ESG basics'. Each serves a distinct purpose. The 'sustainable' category covers products contributing directly to sustainability goals. The 'transition' category applies to those channelling capital toward companies or projects on a credible path to sustainability. The 'ESG basics' category includes products integrating ESG approaches but not meeting the stricter criteria of the other two.

The Council’s position adds specific conditions for certain investments. Companies active in the fossil fuel sector may qualify for the transition category if they allocate at least 20% of capital expenditure to EU taxonomy-aligned activities. They must also have a clear, time-bound strategy to reduce greenhouse gas emissions. Additionally, general-purpose issuances by public sector bodies in the EU could be included in the transition category under certain conditions.

The mandate strengthens disclosure requirements for the 'sustainable' and 'transition' categories. Financial products in these groups must use at least three mandatory indicators set by the European Commission. The proposal also seeks to simplify the system, making sustainability claims easier to assess and reducing administrative burdens for financial firms.

To ease compliance, the mandate exempts alternative investment funds offered only to professional investors from the categorisation provisions. The Council’s mandate allows negotiations with the European Parliament to begin once Parliament adopts its position. The framework aims to direct capital more effectively through Europe’s sustainable finance market. It also supports broader EU goals on competitiveness, climate action, and social policy.