SFDR Meets CSRD: The Data Supply Chain That Was Never Fully Built
The regulatory logic was elegant: CSRD would compel companies to publish audited, structured sustainability data; SFDR would channel that data into product-level disclosures that investors could actually compare. Supply would meet demand. The problem is that both sides of that equation shifted simultaneously - and in opposite directions.
On the demand side, SFDR is being rebuilt around formal product categories that require financial market participants to make specific, substantiated sustainability claims. On the supply side, the Omnibus I scope cuts have removed roughly 90% of companies from mandatory CSRD reporting, thinning the pool of audited corporate data those claims depend on. The result is a structural mismatch that will not resolve itself when SFDR 2.0 enters into force - and that financial market participants need to plan around now.
What SFDR 2.0 Actually Changes
On 20 November 2025, the Commission published a proposed Regulation (SFDR 2) to simplify the SFDR's requirements, reduce administrative burdens, improve comparability for investors, and introduce a straightforward, retail-friendly categorisation for products making ESG-related claims.
The structural shift is significant. The proposal moves the SFDR regime from a disclosure regime - the current Articles 6, 8, and 9 - to a product categorisation regime. The proposal replaces the current Article 8 and Article 9 classifications with product categories, each subject to strict eligibility criteria: a Transition category for financial products supporting a credible pathway toward sustainability, a Sustainable category for products pursuing a defined sustainability objective, and an ESG Basics category for products that integrate ESG considerations beyond mere risk management but do not meet the criteria of the two higher categories.
Each category carries a general requirement for at least 70% of the portfolio to support the relevant strategy. The Council's negotiating mandate, agreed on 24 June 2026, added a further condition: for products in the Sustainable and Transition categories, disclosure of principal adverse impacts is a qualifying condition, with a mandatory requirement to use at least three indicators from a list to be set by the European Commission.
On entity-level obligations, the direction is clear. The draft Regulation deletes entity-level principal adverse impacts (PAI) reporting and remuneration policy disclosures from the SFDR, repealing Articles 4 and 5. The Commission's simplification approach instead focuses on product-level transparency and categorisation, in coherence with the evolving scope of corporate reporting under the CSRD.
Where the legislative process stands as of August 2026: On 24 June 2026, the EU Council published its negotiating mandate for SFDR 2.0. The European Parliament is separately developing its own position, and the final legislation will only emerge from trilogue negotiations between all three institutions. An agreement on a final text is expected for Q4 2026 / Q1 2027. Allowing for a period of negotiation, and given that the Council is proposing a 24-month implementation period, this implies a final implementation date at some point in mid- to late-2029.
SFDR 1.0 remains fully in force throughout the trilogue. The current PAI framework under Delegated Regulation (EU) 2022/1288 — including the 30 June annual statement deadline and the 14+2 mandatory indicator requirement — continues to apply. Do not defer compliance pending SFDR 2.0.
Where the Data Was Supposed to Come From
The CSRD-to-SFDR data chain was designed as a closed loop. CSRD reporters would publish ESRS-structured disclosures - including the datapoints in ESRS 2 Appendix C that map directly to SFDR PAI indicators - and financial market participants would draw on that structured, assured data to populate product-level disclosures and, under SFDR 2.0, to substantiate category claims.
The revised ESRS delegated act, adopted 3 July 2026, applies from FY2027 (with FY2026 early adoption permitted). It is subject to a two-month Council/Parliament scrutiny period, extendable by two months. When it does apply, it will provide a cleaner, more proportionate set of datapoints - but the population of companies producing those datapoints has shrunk dramatically.
The Omnibus I scope cuts removed an estimated 90% of companies from mandatory CSRD reporting, concentrating the obligation on entities with more than 1,000 employees and more than €450 million net annual turnover. For a diversified equity or credit portfolio, this means a large share of investee companies - particularly mid-cap, non-EU, and private market issuers - will produce no CSRD-structured data at all. The data chain that SFDR 2.0 assumes is, for many portfolios, largely absent.
SFDR itself is now likely to remain the primary sustainability disclosure obligation at entity level for many financial firms. With CSRD scope narrowed and CSDDD obligations similarly contracted, financial market participants face the unusual position of being subject to more demanding product-level disclosure requirements while the corporate data infrastructure those requirements depend on has contracted.
The Four Gap Types
The mismatch is not uniform. It operates through four distinct mechanisms, each requiring a different response.
| Gap Type | Mechanism | Concrete Example | Investor Impact |
|---|---|---|---|
| Scope gap | Investee no longer in mandatory CSRD scope | A mid-cap EU manufacturer with 800 employees and €300M turnover — previously a Wave 2 reporter — is now entirely out of scope. No ESRS disclosure, no assured PAI datapoints. | FMP must rely on estimates or third-party proxies for the full indicator set, with no primary data anchor. |
| Materiality gap | Double materiality allows lawful omission of topics an investor needs | A logistics company concludes through its double materiality assessment that biodiversity is not material. It lawfully omits ESRS E4. The FMP's PAI Indicator 7 (biodiversity-sensitive areas) has no primary data source. | Absence of disclosure cannot be read as absence of impact. FMP must document the gap and apply estimation methodology. |
| Methodology gap | Different calculation bases and consolidation boundaries between ESRS and SFDR indicators | A non-EU group applies the mixed reporting approach under ESRS-40a. Its Scope 3 GHG figure uses a different consolidation boundary than the SFDR PAI Indicator 1 methodology. The numbers are not directly comparable. | Even where primary data exists, it may not be usable without adjustment. Methodology documentation and audit trail become essential. |
| Taxonomy-alignment thinning | EU Taxonomy 2026 changes reduced the volume and granularity of alignment data | The 10% materiality threshold introduced in January 2026 means a company with a small eligible activity need not assess it for alignment. The FMP's taxonomy-alignment KPI for that investee is now a floor, not a precise figure. | Taxonomy-alignment data available from reporters is thinner and less granular. The 15% taxonomy-alignment shortcut for the Sustainable category under SFDR 2.0 becomes harder to verify. |
Scope gaps: the silent majority of your portfolio
The Omnibus process set a new threshold for CSRD to exclude companies with fewer than 1,000 employees and less than €450 million in annual revenues, removing an estimated 90% of companies from the regulation's sustainability reporting requirements. For asset managers with broad mandates - particularly those holding small and mid-cap equities, high-yield credit, or private assets - this means the majority of investees will produce no ESRS-structured data. The data chain simply does not reach them.
Materiality gaps: lawful silence is not the same as no impact
CSRD requires a double materiality assessment, which means companies only report on sustainability issues that are deemed materially relevant. SFDR, by contrast, requires disclosure of specific PAI indicators regardless of materiality. This creates a potential data gap between what companies report and what financial institutions need.
The gap is sharpest for non-climate indicators. Biodiversity impact (PAI Indicator 7) requires location-specific data on company sites that is rarely published; unadjusted gender pay gap (Indicator 11) and board gender diversity (Indicator 12) may not be available for companies in jurisdictions without mandatory pay transparency requirements. A company that lawfully omits ESRS E4 (biodiversity) or ESRS S1 (own workforce) after a double materiality assessment leaves a gap that the FMP cannot fill from primary data.
Methodology gaps: the same number, differently calculated
Although the revised ESRS should provide useful underlying data for some indicators, the mapping is unlikely to be complete. Differences in materiality, calculation methodology and reporting boundaries - particularly where a non-EU group applies the mixed approach - may leave gaps for non-climate indicators. Fund managers may therefore still need separate portfolio-company data or estimates.
This is not a failure of either framework in isolation. ESRS and SFDR were designed with different primary users in mind - ESRS for a multi-stakeholder audience, SFDR for investor-facing product disclosure. The alignment is real but imperfect, and the imperfections compound when non-EU groups apply mixed reporting approaches with different consolidation perimeters. Our guide to CSRD for non-EU companies covers the mixed approach and its boundary problems in detail.
Taxonomy-alignment thinning
The EU Taxonomy changes in 2026 introduced a 10% materiality threshold that allows companies to skip detailed eligibility and alignment assessment for small activities, and cut template datapoints by roughly 64%. The EU Taxonomy 2026 changes introduced a 10% materiality threshold and cut template datapoints by roughly 64%, further thinning the taxonomy-alignment data investors can source from reporters. For FMPs relying on taxonomy-alignment data to substantiate claims under the proposed Sustainable category, this means the figures available from reporters represent a floor rather than a precise measure of alignment.
What Financial Market Participants Can Do Now
The gaps are structural and will not be resolved by the time SFDR 2.0 enters into force. The practical question is how to build a disclosure framework that is defensible under the current rules and scalable into the new regime.
Not all PAI indicators carry equal weight under SFDR 2.0. The Council's position requires at least three indicators from a Commission-defined list as a qualifying condition for the Sustainable and Transition categories. Identify which indicators are most likely to appear on that list — GHG emissions, fossil fuel exposure, and gender pay gap are strong candidates — and concentrate primary data collection efforts there. Treat remaining indicators as a best-efforts exercise with documented estimation.
For investees outside mandatory CSRD scope, the VSME standard provides a standardised, proportionate format for responding to ESG data requests. The VSME Basic Module covers approximately 46 datapoints including Scope 1 and 2 emissions — not Scope 3, and not a full PAI set, but a documented primary data anchor that is better than a pure proxy. Requesting VSME-format responses is more likely to succeed than bespoke questionnaires, and it respects the value chain cap that limits what large reporters can demand from smaller counterparties.
SFDR 2.0 explicitly acknowledges that data gaps are unavoidable. Article 12a of the proposal introduces a requirement that estimates not based on external data providers must be based on formalised and documented methodologies. Build that governance now: document the estimation approach for each indicator where primary data is unavailable, record the data sources and assumptions, and establish a review cadence. This is not just good practice — it is a likely compliance requirement under the new regime.
The current framework already requires FMPs to disclose the proportion of data that is estimated. Under SFDR 2.0, transparency about estimation is elevated further. Disclosures that clearly distinguish primary data from estimates — and explain the methodology behind estimates — are more defensible under supervisory scrutiny than disclosures that present a single blended figure without provenance.
What Corporates Should Take From This
The scope reduction in CSRD does not reduce investor and lender data requests. It shifts them from a regulated channel to an unregulated one.
Companies that have exited mandatory CSRD scope will still receive ESG questionnaires from asset managers, banks, and insurers who need to populate PAI statements, substantiate category claims, and satisfy their own supervisors. Those requests will not be standardised, will not be capped by the VSME framework unless the requesting party is itself a CSRD reporter making a value-chain request, and will not come with the benefit of ESRS guidance on how to calculate the relevant metrics.
The value chain cap limits what large CSRD reporters can demand from smaller suppliers in the context of their own CSRD reporting. It does not limit what a bank or asset manager can ask in the context of SFDR compliance or credit underwriting. Those are separate regulatory contexts, and the cap does not apply to them.
For companies that have exited CSRD scope, the practical implication is clear: voluntary adoption of the VSME standard, or at minimum a documented approach to the most commonly requested indicators (Scope 1 and 2 GHG, gender pay gap, board diversity, fossil fuel exposure), will reduce the cost and friction of responding to investor requests - and will produce more consistent, comparable data than ad hoc responses to bespoke questionnaires.
What to Watch Between Now and Q1 2027
The legislative and technical calendar between now and the expected trilogue conclusion is dense. Three areas deserve close attention.
Trilogue outcomes on the product categories. The Commission's three-category structure (Sustainable, Transition, ESG Basics) is broadly preserved in the Council's position, but the Parliament's position - with an ECON vote that has reportedly moved to September 2026 - may introduce further changes. The professional-investor AIF exemption, the precise taxonomy-alignment threshold, and the fossil fuel exclusion criteria are all live issues. The final category definitions will determine which PAI indicators become qualifying conditions and therefore which data gaps are most urgent to close.
Level 2 work. The Commission's proposal repeals the existing RTS (Delegated Regulation (EU) 2022/1288) and delegates the PAI indicator list, the category-specific disclosure templates, and the estimation methodology requirements to future delegated acts. That Level 2 work cannot begin in earnest until the Level 1 text is agreed. FMPs should expect a compressed implementation timeline once the final text is published.
Interaction with the revised ESRS. The revised ESRS delegated act was adopted 3 July 2026, applies from FY2027, with FY2026 early adoption permitted, and is subject to a two-month Council/Parliament scrutiny period extendable by two months. The revised ESRS will reduce the datapoint burden on reporters but will not close the materiality gap or the scope gap. EFRAG's ongoing work on the ESRS-40a standards for non-EU groups - with an exposure draft published 23 July 2026 - is relevant for FMPs with significant non-EU holdings, but the consultation does not close until 31 October 2026 and the standards will not apply for some time after that.
The supply-and-demand mismatch at the heart of this piece is not a temporary implementation problem. It is a structural feature of a framework that was designed when CSRD scope was much wider. Managing it requires deliberate choices about data priorities, estimation governance, and disclosure transparency - choices that are better made now, before the new category regime enters into force, than retrofitted under supervisory pressure.
This article is guidance to help you understand the SFDR and CSRD regulatory landscape. It is not legal or professional advice. Confirm specifics against the primary sources and seek qualified advice before relying on any conclusions for your own compliance or disclosure decisions.
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