Firms expanding fossil fuel production could be included in new SFDR transition category
The EU could allow firms actively expanding oil and gas exploration to be included in new transition funds amid lobbying from the fossil fuel industry
The Council of the EU has narrowed its definition of sustainable fund labelling categories, in a move that could have widespread implications for Europe’s €10tn sustainably labelled fund market, according to a a position paper released today.
The European Commission first announced the overhaul of SFDR fund-labelling rules at the end of last year. First introduced in 2021 as part of the EU’s Action Plan on Sustainable Finance, the Sustainable Finance Disclosure Regulation (SFDR) was originally intended as a disclosure framework but evolved into a de facto labelling regime, reflecting growing investor demand for clarity on sustainability credentials. The market for SFDR Article 8 funds exceeded €9tn by the end of 2024, according to EFAMA data.
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In a bid to establish minimum criteria and prevent greenwashing, the EU is now overhauling the existing rules, introducing a distinction between Sustainable, Transition and ESG Basics funds.
Transition category contested
Of these three categories, the Transition label has emerged as a particular point of contention. While the category was created to enable the inclusion of hard-to-abate but decarbonising industries, the Commission’s original proposals included a requirement for companies to refrain from actively expanding the exploration and production of oil and gas assets.
Scientists have warned that new oil and gas expansion is fundamentally incompatible with the aims of the Paris Agreement.
However, that requirement has been dropped from today’s proposals, which instead require companies to allocate at least 20% of their capital expenditure (CapEx) to economic activities aligned with EU Taxonomy rules.
The new rules are also focused exclusively on Scope 1 and Scope 2 emissions, even though around 85–90% of oil and gas companies’ emissions typically fall into the Scope 3 category.
Criticising the latest proposals, Lara Cuvelier, sustainable finance campaigner at Reclaim Finance, said: “Governments have given in to the lobbying from TotalEnergies and the other oil majors and put forward an option that allows blatant greenwashing of fossil fuel investments. As parts of Europe swelter under a heatwave exacerbated by climate change, it is outrageous that the Council has chosen to listen to the oil and gas lobby and not exclude companies developing oil and gas from the transition label. MEPs face a simple choice – vote to support a fossil fuel future, or vote to protect the wellbeing of European citizens.”
Responding to these criticisms, a spokesperson for the Council said companies with activities in the fossil fuel sector can still play an important role in the green transition, for example by developing low-carbon fuels or building electric vehicle charging infrastructure.
“The Council position indeed clarifies that only investments in companies active in the fossil fuel sector which allocate 20% of their capital expenditures to taxonomy-aligned economic activities, and have a clear, time-bound strategy to reduce their Scope 1 and Scope 2 greenhouse gas emissions, compatible with limiting global warming in line with the Paris Agreement, may be considered for inclusion in the Transition category” the spokesperson added.
Cuvelier said: "As NGO’s we are not saying they should not have any fossil fuel companies, if within one year they could fully commit to stopping to explore new oil and gas production, there might be a place for them in the transition category, but we need to have minimal safeguards in place. Right now, this sends the message to investors that transition funds are funding progress when these proposals would allow the inclusion of firms which are actively worsening climate change."
In 2026, global investment in clean energy and related infrastructure is expected to reach around $2.2tn, almost double investment in fossil fuels, according to the International Energy Agency’s latest World Energy Investment report. However, oil and gas companies account for less than 5% of total clean energy investment globally, the IEA said.
TotalEnergies transition court case
The latest proposals overlap closely with positions previously put forward by French energy giant TotalEnergies, which currently targets 20% of its portfolio to be in power and low-carbon energy businesses by 2030. Under the proposed rules, this could mean that TotalEnergies’ bonds and shares are eligible for inclusion in the Transition category, while some other oil and gas majors could be excluded.
In a response to the EU’s initial proposals seen by Net Zero Investor, TotalEnergies wrote in April that it “welcomes the inclusion of the transition category” but added: “We believe that excluding companies solely because they invest in new oil and gas projects, while disregarding their significant and expanding contribution to low-carbon energy, weakens key objectives the European Union wants to achieve.”
Between January and June, TotalEnergies held around 35 meetings with MEPs, according to Parliament records, with several meetings in May explicitly referencing discussions on SFDR.
But the implications extend beyond eligibility for transition funds. Last year, a French court ruled that TotalEnergies had misled consumers by claiming that it was transitioning while continuing to expand fossil fuel production. The EU’s revised interpretation of what constitutes a “transition” could now strengthen the company’s position in any appeal.
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