SFDR 2.0, due diligence and climate stress tests

Italian Sustainable Investment Forum

Progress on the revision of the SFDR, the consultation on the CSDDD guidelines, and updates for the banking sector.

The European sustainable finance regulatory framework continues to evolve, with significant developments in recent weeks.

SFDR revision 

The revision of the Sustainable Finance Disclosure Regulation (SFDR) continues to move through the legislative process. Following the European Commission’s proposal and the Parliament’s initial positions, the Council of the EU adopted its negotiating position on 24 June. The Council’s position confirms the overall structure of the reform based on three categories of financial products, while introducing some significant changes. These include the requirement to use at least three Principal Adverse Impact (PAI) indicators for Article 7 and Article 8 products where firms identify and disclose them in order to qualify for the relevant category; a maximum three-year transitional period to meet the 70% threshold established for each category; and the inclusion, within the transition products category, of investments in fossil fuel companies, provided that at least 20% of their capital expenditure is aligned with the EU Taxonomy and that they have Scope 1 and Scope 2 emissions reduction targets in place. In addition, general purpose sovereign bonds may contribute to transition objectives up to a limit of 15% of the portfolio, while alternative funds reserved exclusively for professional investors would be excluded from the scope of the SFDR.

CSDDD: consultation on the future guidelines

The Commission has launched a public consultation on the non-binding guidelines for the implementation of the Corporate Sustainability Due Diligence Directive (CSDDD), open until 24 July. The objective is to support companies in implementing due diligence obligations across the value chain with regard to human rights and environmental issues. The guidelines will be published in two stages: a first tranche, due in July 2027, will focus on risk identification and prioritisation, stakeholder engagement, available data sources, digital tools and model contractual clauses; a second tranche, scheduled for July 2028, will address resource- and information-sharing in line with trade-secret protection and protection from retaliation and retribution. The final adoption of the guidelines is expected in the first quarter of 2027.

Simplification of environmental legislation

Discussions are also continuing on the so-called Omnibus VIII package, the Commission’s initiative aimed at reducing administrative burdens and accelerating environmental permitting procedures. The Council has confirmed the overall objective of simplification while maintaining European environmental protection standards but has temporarily suspended negotiations on the proposals concerning Extended Producer Responsibility (EPR), pending broader agreement among Member States. At the same time, the European Parliament has begun examining the proposed Regulation on speeding-up environmental assessments. Among the main innovations are a single coordination system for the different assessments relating to the same project, enhanced digitalisation and data interoperability, and a new advisory role for the so-called Environmental Single Points of Contact, designed to support developers throughout the entire permitting process.

New ESG disclosures and climate stress tests for banks

The European Banking Authority (EBA) has published the final version of the Implementing Technical Standards (ITS) updating Pillar 3 disclosures on ESG risks. The main changes include new disclosure requirements relating to equity exposures and shadow banking, the extension of reporting obligations to large non-listed banks, Small and Non-Complex Institutions (SNCIs) and large subsidiaries, as well as a proportionate approach with differentiated templates based on the size of institutions. The new requirements are expected to apply from 31 December 2026, and from 31 December 2027 for SNCIs, subject to approval by the Commission.

The EBA has also launched a consultation on the methodology, templates, and guidelines for the 2027-2029 EU-wide banking stress test. For the first time, the framework will include a dedicated module on climate-related risks, integrating both physical and transition risks into the macroeconomic scenarios. The shocks considered include sudden tightening of climate policies and simultaneous river flooding events. Although the climate module will not yet directly affect the core stress test results, it represents an important step towards the full integration of climate-related risks into European banking supervision.