I think the sprite assets are actually 3D converted to 2D, since when I tried it on Retroarch some years ago, activating widescreen, the characters looked OK, not stretched, I could be wrong, though.
Shaders are personal choices, you may prefer those who soften the image, there are those who like the crt look.
I can’t help much there, try a lot of them and see the one you like best.
You can start with Retroarch\shaders\shaders_slang\denoisers\crt-fast-bilateral-super-xbr, then try the ones from the “scale” and “x” folders, like scanlefx, scalenx, xbr, xsal, etc.
This image below I recorded for the Hyperspin frontend some years ago, looking at it now, it intrigues me since I could swear I increased the internal resolution and activated widescreen, if you noticed, the characters aren’t stretched like I said above.
Have you tried setting the internal resolution to 2x in the non HW core?