The European Union Council has agreed on its negotiating position to revise the Sustainable Finance Disclosure Regulation (SFDR), proposing changes that would simplify sustainability disclosures for investment products while introducing stricter criteria for funds marketed as sustainable.

The proposed revisions seek to make it easier for investors to compare financial products that incorporate environmental, social and governance (ESG) considerations. The Council said the changes would also reduce reporting complexity for financial market participants and improve the consistency of sustainability-related information across the bloc.

The revised framework replaces the existing disclosure-based approach with three product categories.

Under the proposal, products classified as "Sustainable" would invest in companies or projects that already meet established sustainability standards. A second category, "Transition," would cover investments in companies working towards sustainability through credible transition plans. The third category, "ESG Basics," would apply to products that integrate ESG considerations but do not qualify under the other two classifications.

The Council said the new structure is intended to address concerns that the current framework has encouraged inconsistent sustainability claims and made it difficult for investors to distinguish between different ESG products.

The negotiating position also introduces stricter eligibility requirements for products seeking Sustainable or Transition status. Financial market participants would be required to disclose the principal adverse impacts of their investments on sustainability factors and report against at least three mandatory indicators that will be developed by the European Commission.

For products in the Transition category, investments in fossil fuel companies could remain eligible under defined conditions. Companies would need to allocate at least 20% of their capital expenditure to activities aligned with the EU Taxonomy for sustainable activities and maintain a time-bound strategy to reduce greenhouse gas emissions. A fourth mandatory indicator would assess additional sustainability impacts.

The Council has also proposed allowing certain general-purpose issuances by EU public sector bodies to qualify for the Transition category, citing their role in investment portfolios, including insurance and pension funds.

To reduce compliance costs, the proposal exempts alternative investment funds marketed exclusively to professional investors from the product categorisation requirements. The Council said these investors generally do not require the same level of standardised sustainability disclosures as retail investors.

The proposal will now form the basis of negotiations with the European Parliament once lawmakers adopt their own position.

The SFDR has been in force since March 2021, requiring financial market participants to disclose how sustainability risks are integrated into investment decisions. According to the European Commission's review, the existing framework has resulted in lengthy disclosures, limited comparability and increasing use of SFDR classifications as informal product labels, contributing to investor confusion and concerns over greenwashing.