The EU’s drive to lighten the regulatory burden on businesses risks clashing with the European Central Bank’s mandate to safeguard financial stability.
ECB president Christine Lagarde has warned that the EU’s proposal to scale back two key sustainability regulations could weaken European institutions’ ability to assess climate-related financial risks.
The European Commission’s omnibus proposal — introduced in February 2025 — will have “significant implications” for the Eurosystem, Lagarde wrote in a letter to members of the European parliament on August 15.
The omnibus is aimed at simplifying EU regulations to enhance industrial competitiveness and reduce regulatory burdens.
The bloc’s sustainability reporting rules — the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive — are also facing significant rollbacks.
The proposed changes to the CSRD would exempt more than 80 per cent of companies currently subject to mandatory reporting requirements. Under the new proposal, only companies with more than 1,000 employees or €50mn in turnover would be required to report.
“No data for 80 per cent of companies [in the EU] hinders the ECB’s ability to assess more precisely climate risks in the economy and spot the systemic risk they can represent for the financial system,” Pierre Monnin, a monetary policy expert at the Council on Economic Policies, tells Sustainable Views.
The Eurosystem requires sufficient high-quality climate data to consider the implications of climate change and nature degradation adequately.
This would mean losing access to concrete, standardised climate data — such as greenhouse gas emissions — which Lagarde identified in her letter as crucial for assessing the implications of climate change and nature degradation.
“The resulting lack of data may mask climate-related financial risk,” the ECB wrote in its opinion on the omnibus proposal, published in May.
Companies currently within scope of the CSRD account for around 37 per cent of the EU’s carbon dioxide emissions, according to ECB estimates.
The proposed reduction in scope would not only significantly lower the share of emissions subject to mandatory reporting, but also exclude some of the region’s largest emitters, including major fossil fuel companies.
“Due to the lack of regulatory-mandated disclosures for the corporate sector, supervised entities such as banks will have more difficulty assessing the extent to which their lending books are exposed to climate risks,” Silvia Merler, a fellow at the Brussels-based think-tank Bruegel, tells Sustainable Views.
Limited data to assess climate risks
In 2022, the ECB announced “climate change collateral pool concentration limits” — a tool aimed at capping the share of assets issued by high-emitting companies that could be used as collateral by Eurosystem counterparties.
However, due to a lack of granular company-level climate data, the central bank was unable to roll out the instrument in 2024.
Instead, in July 2025, the ECB introduced a new mechanism — a “climate factor” — within its collateral framework.
Designed to address climate-related financial risks, the climate factor aims to protect the Eurosystem against potential declines in the value of collateral accepted in its refinancing operations. It is scheduled for implementation in the second half of 2026.
However, the scope for the new instrument is limited as it only applies to corporate bonds.
Monnin notes that while the proposed omnibus amendments may not directly impact risk management for corporate bonds within the collateral framework, they would make it more difficult for the ECB to manage financial risk in other eligible asset classes, such as bank bonds, asset-backed securities and credit claims, which alone makes up around 30 per cent of assets pledged by banks.
“These asset classes rely much more on smaller companies, for which data will not be available. This hinders the ECB’s duty to manage risk on its balance sheet,” Monnin says.
“Without sufficient comparable, robust and granular data, there is a risk that adjustments applied under the climate factor are either incomplete or distorted, particularly at the firm and asset level, undermining the effectiveness of the climate factor as a financial stability tool,” Andrew Garraway, head of climate policy at climate analytics company Risilience, tells Sustainable Views.
Concerns about size-based approach
Under the current CSRD framework, all credit institutions are required to comply with sustainability reporting obligations.
The ECB estimates the proposed changes would exclude around one in eight “significant” organisations from these requirements, along with the vast majority of less significant institutions.
This reduction in coverage would result in gaps in publicly available environmental, social and governance data from the banking sector, ultimately weakening the EU’s broader objective of ensuring transparency in financial markets.
The ECB warns that “the resulting lack of data may mask climate-related financial risk”, adding that “ESG risks are not necessarily proportionate to an institution’s size”, in its opinion on the omnibus proposal.