Initiatives underway to reduce European sustainability reporting and due diligence reporting requirements could limit the European Central Bank’s capability to manage climate risk in the financial system, according to a letter sent by ECB President Christine Lagarde to European Parliament lawmakers.
The letter comes as lawmakers prepare to debate the European Commission’s Omnibus I package, aimed at significantly reducing the sustainability reporting and regulatory burden on companies, with proposals for major changes to a series of regulations including the CSRD, the Corporate Sustainability Due Diligence Directive (CSDDD), as well as the Taxonomy Regulation, and the Carbon Border Adjustment Mechanism (CBAM).
Among the most significant changes included in the package was a dramatic decrease in scope for the CSRD, moving the regulation to cover only companies with more than 1,000 employees from the current 250 employee threshold, removing an estimated 80% of companies from the regulation’s sustainability reporting requirements, as well as reduced reporting requirements for those remaining covered by the regulation. The package also proposes changing the CSDDD to require full human rights and environmental due diligence only at the level of direct business partners, and to require less frequent due diligence monitoring.
Several lawmakers have pushed for even sharper cuts to the CSRD and CSDDD scopes, including Parliament’s Omnibus rapporteur Jörgen Warborn, who has proposed raising the threshold of companies covered by the CSRD and CSDDD to those with more than 3,000 employees and €450 million in revenue.
In her letter, Lagarde noted several moves the ECB has made to incorporate climate change factors into its monetary policy framework over the past few years, including considering climate risks when reviewing haircuts in its collateral framework since 2022, incorporating climate change considerations into in national central banks’ assessments of the creditworthiness of collateral since 2024, and recently announcing the introduction of a “climate factor” within the Eurosystem’s collateral framework to protect against potential decline in value of collateral in event of adverse climate-related transition shocks, set to begin in 2026.
Lagarde added, however that in order “to adequately consider the implications of climate change and nature degradation, the Eurosystem requires sufficient high-quality climate data,” and warned that the Omnibus package’s changes may impact the ECB’s climate-related measures.
Specifically, the letter warned that proposed the scope reduction in the CSRD “would limit the availability of firm-level data, thereby weakening the Eurosystem’s ability to perform a granular assessment of climate-related financial risks on its balance sheet and within its collateral framework,” and that other planned changes and delays to the CSRD and CSDDD would reduce the ECB’s ability to implement climate-related measures.
Lagarde added:
“It is therefore important that these amendments strike the right balance between retaining the benefits of sustainability reporting for the European economy and the financial system while also ensuring that the requirements are proportionate.”
