EU Council Locks In SFDR 2.0 Negotiating Position — Fossil Fuels Permitted in Transition Funds

On June 24, the Council of the European Union agreed its official negotiating position on SFDR 2.0, overhauling the sustainable finance disclosure framework around a new three-tier product classification system: Sustainable (highest standards), Transition (credible decarbonization pathway), and ESG Basics (general integration). The Council's position includes a significant concession: fossil fuel companies can qualify for the Transition category provided at least 20% of capital expenditure is aligned with the EU Taxonomy and a time-bound emissions reduction strategy is in place. Financial market participants in the Sustainable and Transition categories must disclose against at least three principal adverse impact indicators from a Commission-issued list. Alternative investment funds marketed exclusively to professional investors are exempted from mandatory categorization — a notable carve-out for private markets. Trilogue cannot begin until the European Parliament adopts its own position, making final text unlikely before 2027. For fund managers and their legal advisers, the Council text is the definitive signal for portfolio repositioning and prospectus redrafting work — the fossil fuel carve-out in particular will require careful documentation of Capex allocation and GHG reduction strategies to withstand regulatory scrutiny and investor challenge.