June 2026
The review of the Sustainable Finance Disclosure Regulation (SFDR) provides an opportunity to simplify a complex policy framework and support the EU’s wider competitiveness ambitions.
As policymakers meet to discuss the specific functioning of various elements of the review, it is helpful to understand the state of sustainability-related data to help inform different policy choices.
Exclusions under new categories
- The proposed exclusions will create a significant reduction in investable universes
According to the European Commission’s proposal, companies deriving more than 1% of revenues from coal/lignite would be excluded from using the proposed Transition, ESG Basics and Sustainable categories.
These exclusions could materially narrow the investable universe, including for companies that play a role in the low-carbon transition.
From a data perspective, the impact is significant: in the FTSE Emerging universe, the proposed Sustainable and Transition exclusions would remove more than 20% of index weight, while in developed markets around 12% of FTSE Developed Europe would be excluded under the Transition category and 14% under the Sustainable category. These effects are especially pronounced in Energy, Basic Materials and Utilities.
In addition, the “no new fossil fuel projects” screen may reduce the distinction between Transition and Sustainable categories.
Overall, this highlights that exclusion-based categorisation is highly sensitive to data availability, coverage and calibration, with direct consequences for portfolio construction and category differentiation.
- Exclusions of investment in companies involved in new projects for exploration, extraction or refining of fossil fuels or those without a clear phase-out plan for coal
The European Commission proposes to exclude investments in companies involved in new projects for the exploration, extraction or refining of fossil fuels, or those without a clear phase-out plan for coal for Sustainable funds.
While many may conceptually agree with the idea of excluding investments linked to new fossil fuel projects, the data is not readily available to support this assessment in the way the provision is currently drafted. The data currently available covers only a very limited set of companies, an important constraint to take into account in the design of the regulation.
- The use of CapEx: a relevant indicator?
It has been suggested that analysis of CapEx relating to Taxonomy-aligned activities might be a way to identify firms that could be included in the transition category. That would require reliance on forward-looking indicators that is not widely available. For instance, LSEG reports that of the 900+ companies in the investable universe for the current Article 9 category, just 17% have a Taxonomy alignment of more than 15% as the other companies cannot evidence alignment[1].
In addition, the reduction in the scope of the CSRD (as well as the delay in reporting requirements) and the introduction of the materiality threshold for Taxonomy reporting will significantly reduce the amount of data available for Taxonomy-aligned CapEx analysis.
Investors may have to rely on estimated or modelled data to use CapEx information to justify inclusions in the transition sector and there may not be sufficient data available to support reliable estimation. Without an effective mechanism to identify companies that could be included in the transition category, there is likely to be little difference between the sustainability and transition categories.
For instance, LSEG estimates that in the FTSE Emerging universe, the proposed Sustainable and Transition exclusions would remove more than 20% of the index weight. In developed markets, approximately 12% of the FTSE Developed Europe index weight would be excluded under the Transition category and around 14% of the same universe would be excluded under the Sustainable category.
Estimates
When public disclosures or corporate sustainability reports are missing, some firms may rely on sophisticated estimation models to fill the gaps. Common approaches include peer comparison (such as sector average computation and/or scale-adjusted modelling), regression modelling (finding predictive correlations to derive estimates – such as GHG emissions based on generation capacity, fuel mix, age and efficiency of plants), the use of input-output models (assessing environmental impact via industry-wide standards and geographic location) or using alternative and geospatial data.
Estimates are a well-established feature of financial markets, and their use in sustainability reporting is a direct consequence of gaps in corporate disclosure. As an example, Bloomberg’s greenhouse gas emissions model, which covers over 130,000 companies globally and draws on more than 800 individual data points, illustrates this clearly: where company disclosures are robust, estimates can be company-specific and precise; where disclosures are absent, models must fall back on broader industry-level proxies.
According to Bloomberg, this pattern is visible in the SFDR Principal Adverse Impact indicators. For GHG-related PAIs 1–3, they observe that data coverage across its universe is high, but this is only possible because sufficient reported data exists to support reliable estimation. Where that reported data may be absent, coverage reduces considerably: PAI 7 on activities affecting biodiversity-sensitive areas has very low data disclosure, and reported data for PAI 8 on emissions to water remains limited. These figures illustrate that estimation can extend and enhance reported data, but it cannot substitute for disclosures that do not exist in the first place.
This points to a broader and important policy conclusion for the SFDR review: regulatory requirements must be calibrated to the practical realities of what companies actually disclose. The proposed 1% revenue threshold for oil and gas exclusions is a case in point — under IFRS 8, companies report at a much higher level of aggregation, meaning the 1% threshold would routinely depend on estimates, risking false precision, inconsistent outcomes across providers, and audit challenges. Firms may collect, organise, and – where necessary – estimate missing information, but they remain fundamentally dependent on reporting entities as the data originators.
The most effective path to improving sustainability-related data quality is to govern disclosure at source — through frameworks such as CSRD and Corporate Sustainability Due Diligence Directive (CS3D). The SFDR review should focus on better aligning the SFDR framework with corporate reporting frameworks (such as CSRD) so that data requirements can be governed at the source.
Data governance
Another important discussion emerging from SFDR reform concerns ESG data.
Transparency, governance and methodological robustness are essential to sustainable finance markets. Investors increasingly use ESG data to support investment decisions, portfolio construction, risk management and disclosure obligations.
At the same time, ESG data is dynamic and continuously evolving, particularly in areas such as physical climate risk analysis and nature data.
Article 12a appropriately requires financial market participants (FMPs) to provide investors with additional information about the data and estimates used in product-level disclosures. Data providers will respond by providing this information to their clients. This should lead to an improved understanding between financial market participants and the providers of information sources they use to conduct their business.
We understand that proposals have been submitted by the co-legislators to amend Article 12a of the SFDR with the aim of ensuring that transparency requirements apply to both financial market participants and data providers. However, the scope of Article 12a of SFDR should not be expanded to regulate third-party sustainability data providers.
The co-legislators have made clear determinations about the scope of the ESG Ratings Regulation – which governs ESG opinions and scores – and the scope of the primary sustainability-related disclosure frameworks – specifically the recent Omnibus review of the CSRD and the CS3D. Moreover, it is important to note the SFDR was never intended to regulate sustainability data providers, as explicitly stated in Recital 24 of the European Commission’s proposal. Regulating these entities would not solve the root cause of data limitations, which is the quality of corporate disclosures.
Having a broad and poorly defined scope for ESG data would also undermine EU competitiveness. By capturing a vast range of data types unintentionally, the resulting uncertainty would deter investment and increase compliance risks. Introducing new rules may also risk significant regulatory duplication and inconsistencies given that ESG data is already covered by existing EU legal frameworks. As policymakers consider the future role of ESG data within the sustainable finance framework, maintaining coherence and interoperability across existing regulations and standards will be critical. Hence, the best way to ensure high-quality sustainability data is to govern its disclosure at source, as in the financial system. The CSRD and CS3D should remain the primary, centralised vehicles for improving the overall quality of sustainability data.
[1] SFDR 2.0: Aligning product design, data reality and the transition agenda | LSEG
About the Future of Sustainable Data Alliance (FoSDA)
The Future of Sustainable Data Alliance (FoSDA) is a multi-member alliance that seeks to enable the power of financial markets to address global environmental and social challenges through the provision of comprehensive and high-quality data and analytics. Our members are drawn from the sustainability data, analytics, ratings, research, and index providers that empower investors, companies, and governments to achieve their sustainability goals.
FoSDA is the collective voice of the sustainability data and analytics ecosystem. Our work focuses on improving the clarity and interoperability of data and analytics on which market participants rely. We facilitate technical dialogue among providers and users of financial information. FoSDA also provides independent advice and feedback to policymakers, regulators and standard-setting bodies, helping to explain data challenges and to promote efficient information flows.
