EU Council Raises SFDR Taxonomy Threshold to 20% and Narrows Fossil Fuel Exclusions for Transition Funds

On 24 June 2026, the Council of the EU agreed its formal negotiating position on the long-awaited reform of the Sustainable Finance Disclosure Regulation (SFDR) . The position rewrites key rules that will determine which funds can call themselves "sustainable" or "transition" — and opens the door wider for fossil fuel companies to qualify for transition-focused products. Here is what changed, how it compares to the European Commission's original November 2025 proposal, and what happens next.

The three new fund categories remain — but the bar is higher

Both the Commission and the Council agree on the core architecture: a new system of three voluntary product categories that will replace the current Article 8 ("light green") and Article 9 ("dark green") framework .

• Sustainable (new Article 9) — funds with a sustainability objective.
• Transition (new Article 7) — funds investing in companies on a credible path to sustainability.
• ESG Basics (new Article 8) — funds integrating sustainability factors.

Under both versions, at least 70% of a fund's portfolio must meet the relevant category criteria . That is a significant increase from today's de facto 50% minimum for Article 9 funds under ESMA guidelines.

Taxonomy-alignment threshold raised from 15% to 20%

The Commission's November 2025 proposal set a 15% EU Taxonomy-alignment threshold for a fund to qualify as Transition or Sustainable, with the power to adjust it later by delegated act . The Council raised that entry threshold to 20% — a move that aligns with the European Parliament's own draft position, which also adopted a 20% requirement .

The practical impact may be limited: according to a 2024 report from the EU Platform on Sustainable Finance, 44% of current Article 9 funds already meet the 20% threshold . Still, the increase raises the floor for all new labelled products.

Fossil fuel companies get a clearer path into Transition funds

This is where the Council position diverges most sharply from the Commission's original text. Under the Commission's proposal, the Transition category excluded companies with ≥1% revenues from hard coal or lignite, companies developing new fossil fuel projects, and companies not phasing out coal or lignite for power generation .

The Council's position narrows these exclusions . Under the Council text, fossil fuel companies that are expanding operations can still qualify for Transition funds if two conditions are met :

• The company allocates 20% of its capital expenditure to economic activities aligned with the EU Taxonomy.
• It has a clear, time-bound strategy to reduce greenhouse gas emissions.

To enhance transparency, such investments also become subject to a fourth mandatory indicator when assessing principal adverse impacts . The Council made this change to "recognise their important role and contribution in transition" .

The Council position is therefore more permissive on fossil fuel inclusion compared to the Commission's original text. Environmental advocates have generally viewed this narrowing of exclusions as a significant weakening of the regulation . The European Economic and Social Committee (EESC), an EU advisory body, had previously called for stronger transition plan requirements, including a mandatory Paris-aligned fossil fuel phase-out plan for companies in Transition funds .

Entity-level PAI and remuneration disclosures are gone

Both the Commission and Council agree on a major simplification: eliminating firm-level principal adverse impact (PAI) disclosures and website publication requirements . Financial market participants will no longer need to disclose how they consider PAI at the entity level. The Commission also proposed removing remuneration policy disclosure obligations, and the Council follows this approach .

The 70% minimum investment threshold stays

Both institutions require that at least 70% of a fund's investments meet the relevant category criteria — sustainable investments, transition investments, or ESG factor integration . This replaces today's de facto 50% minimum for Article 9 funds and is designed to improve comparability and prevent greenwashing .

Key differences at a glance

Issue	Commission Proposal (Nov 2025)	Council Position (June 2026)
Taxonomy-alignment threshold	15% for Transition/Sustainable categories	20%
Fossil fuel exclusions in Transition category	Broad exclusions for coal/lignite (>1% revenue) and new fossil fuel projects	Narrower exclusions — allows expanding fossil fuel operations into Transition funds if 20% capex is Taxonomy-aligned
Product categories	Three categories (Sustainable, Transition, ESG Basics)	Same three categories, largely aligned
Entity-level PAI disclosures	Removed	Removed
Remuneration disclosure	Removed	Removed
70% minimum investment threshold	Yes, 70% of portfolio allocated to the stated approach	Yes, 70% retained

The Council position is broadly more permissive on fossil fuel inclusion in Transition funds and stricter on the taxonomy-alignment entry threshold (20% vs 15%) compared to the Commission's original text.

What comes next: trilogue negotiations

With the Council's position now agreed, the real bargaining begins. Trilogue negotiations between the European Commission, the Council, and the European Parliament will reconcile the three positions into a final text .

Key open points:

• Scope of fossil fuel exclusions: The Parliament's draft version also takes a tougher line on exclusions, so this will be a central fight .
• Taxonomy threshold: Both Parliament and Council are at 20%, but the Commission may push back toward its original 15% .
• Professional-investor opt-out: The leaked draft included a carve-out for alternative investment funds marketed only to professional investors, but both the Commission's formal proposal and the Council position removed it. The Parliament may seek to reintroduce it .

Application date: January 2029

The target application date is January 2029, giving the industry and regulators roughly 2.5 years to implement the new categories and disclosure rules after the regulation is adopted .