Are we entering a new era of pragmatic complexity, or simply losing the thread of the sustainability agenda?
With this question, Lorenzo Saa, Chief Sustainability Officer at Clarity AI, opened a recent conversation with Patricia Pina, Clarity AI’s Chief Research Officer, and Cornelius Müller, Policy Officer at the Sustainable Banking Coalition. The group discussed over an online session four fault lines reshaping sustainable finance in 2026. What follows is a distillation of that conversation and what it means in practice.
1. Regulatory fragmentation is redefining global investment strategies
The ambition of global sustainable finance regulation has shifted from a race for high standards to a complex exercise in management and interoperability. Our research indicates that nearly 90% of firms identify the increasing localization of regulations as a primary hurdle in their decision-making processes.
Cornelius Müller traced the arc from Brussels: the EU designed its European Sustainability Reporting Standards (ESRS) standards under Corporate Sustainability Reporting Directive (CSRD) to function as a global template, betting on the Brussels effect, the expectation that other jurisdictions would align with EU rules rather than risk losing access to its market. As he explains, that assumption did not hold.
“The ambition the EU had to really put forward its own standards — using the so-called Brussels effect — did not quite materialise. And we see now we’re falling back on the national level legislation. Unfortunately, we’re not heading towards one global standard; we are heading towards different ways, and we see some sort of consolidation, but not fully.”
The ambition the EU had to really put forward its own standards — using the so-called Brussels effect — did not quite materialise. And we see now we’re falling back on the national level legislation. Unfortunately, we’re not heading towards one global standard; we are heading towards different ways, and we see some sort of consolidation, but not fully.”
Patricia Pina reinforced that convergence is often illusory even where it appears on the surface. Countries adopt ISSB differently; some copy and paste it, others build their own local version. And even where frameworks look similar, the details diverge: products that would qualify for the ESG Basics label under the new SFDR 2.0 would probably never receive a label under the UK SDR.
Her practical prescription: map these discontinuities and automate workflows across three levels: data disclosure, compliance reporting, and product strategy. As Lorenzo Saa noted, this adaptation is not without cost; beyond the operational burden, there is a subtler price: the competencies firms spent years developing may no longer be relevant, a form of wasted investment that rarely appears on any balance sheet.
2. SFDR and Omnibus: simplification that created new complexity
If the global picture is one of divergence, the EU picture is one of deliberate retreat and rebuild. Cornelius Müller described the dynamic as a pendulum:
“We lost investments, we lost knowledge, and we also lost a bit of trust in the whole system. The Commission has been cherry-picking what has been said in the Draghi and Letta reports — exclude 80 to 90% of the companies, and from one moment to the other, we have a competitive Europe again. The truth is that it is not quite the reality. It has been sold as the silver bullet, and I don’t think it has helped.”
On SFDR 2.0, the Commission’s November 2025 proposal replaced Articles 8 and 9 with three formal categories (Transition, ESG Basics, Sustainable), each requiring 70% portfolio alignment and standardised exclusions, with implementation expected around 2028. Patricia Pina’s advice was clear: start preparing now, build on what already exists, and treat the transition as an opportunity rather than a compliance burden.
“Start early getting ready, at least thinking about it. You don’t need to take action, but start digesting and thinking about the transition and the changes that are coming. And don’t try to start from scratch — use compliance as an opportunity to create value for the business.”
“Start early getting ready, at least thinking about it. You don’t need to take action, but start digesting and thinking about the transition and the changes that are coming. And don’t try to start from scratch — use compliance as an opportunity to create value for the business.”
3. Data gaps: the problem CSRD was supposed to solve
The data gap problem in sustainable investing has always been there. The difference is that CSRD represented a credible promise that it would get meaningfully better. Investors built strategies around that promise. What the Omnibus Directive has done is remove it, not delay it. Around 80–90% of previously in-scope companies are now exempt from mandatory reporting. Wave 2 companies will not file until 2028; Wave 3 listed SMEs have been removed from the scope entirely.
“The paradox in Brussels is that policymakers really encourage the use of data. And yet the direction being set in legislation has a real-world impact on how data is available. We try to make it simpler, while also being very much aware that the data is needed,” said Cornelius Müller.
“The paradox in Brussels is that policymakers really encourage the use of data. And yet the direction being set in legislation has a real-world impact on how data is available. We try to make it simpler, while also being very much aware that the data is needed”
Patricia Pina signaled that this is not a reason to pause. Navigating the new data landscape requires a shift in mindset: rather than waiting for perfect primary data, investors should prioritise where they go deep. That means using voluntary ESRS SME standards as the baseline for primary data collection, concentrating due diligence on the holdings that carry the most exposure, and filling remaining gaps by triangulating proxies, third-party estimates, and alternative sources such as asset-level emission inventories.
“Data is not going to be perfect. I don’t think data should be an excuse for us not to make progress. We have enough data to make progress. Uncertainty is not only linked to data. We live with uncertainty. That doesn’t stop us from making decisions.”
One point worth noting: market expectations will not soften in proportion to regulatory retreat. Banks, insurers, and institutional investors will keep asking for sustainability or extra-financial information regardless of whether a legal mandate exists.
4. Geopolitics is expanding the debate on what counts as “sustainable”
Perhaps the most disruptive force in 2026 is one no regulatory body designed for: a volatile geopolitical environment, forcing a rethink of which sectors and activities can credibly carry a sustainability label.
Cornelius Müller pointed to a revealing asymmetry: the public debate is moving faster than regulation itself. Policymakers are active participants in that conversation, helping shape it, but translating discourse into binding rules is a much slower process. That lag is not necessarily a problem: it gives the industry time to assess whether emerging ideas, like reclassifying defence as sustainable, reflect a genuine shift in thinking or simply the political mood of the moment.
Defence is the most visible flaspoint: having it categorised as sustainable is now actively discussed at the EU level as a mechanism to unlock specific funding streams. Technology compounds the complexity. Patricia Pina gave an example of where existing definitional boundaries are already breaking down:
“The definition of controversial weapons, as we know it today, is very specific, very narrow. However, we are in a world where AI is being used to process surveillance satellite images, to identify targets, and to come up with coordinates. Are those systems used to power autonomous lethal weapons? Does that usage fall under a “controversial weapon”? I think there are some very fundamental and critical questions that are just emerging, and we are going to have to answer and engage with them.”
“The definition of controversial weapons, as we know it today, is very specific, very narrow. However, we are in a world where AI is being used to process surveillance satellite images, to identify targets, and to come up with coordinates. Are those systems used to power autonomous lethal weapons? Does that usage fall under a “controversial weapon”? I think there are some very fundamental and critical questions that are just emerging, and we are going to have to answer and engage with them.”
Her recommendation: clarity and transparency, grounded in explicit methodology. When the definition of sustainable is contested, the quality of your analytical framework matters more, not less.
Navigating a new era of sustainable finance
The picture that emerges is not one of collapse, but of productive, demanding complexity. The firms that will navigate it well are not those waiting for regulatory certainty, but those investing now in the infrastructure — data strategy, product assessment, methodology documentation — that holds up regardless of which direction regulation moves next.
Reassess your product portfolio against SFDR 2.0 categories now. Understand which funds qualify under the new 70% thresholds and which will require restructuring. The shape of the change is clear enough to act on.
Build data gap management into your core infrastructure. Proxy methodologies, alternative data, and risk-based due diligence have become essential in a market where mandatory disclosure has significantly contracted.
Develop an explicit position on contested sectors. Defence, AI, and dual-use technologies will not resolve themselves. Investors need frameworks that can articulate a reasoned position, and the honesty to acknowledge where genuine uncertainty remains. Methodology is your protection.
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