The European Central Bank (ECB) may face challenges in managing climate risk within the financial system due to initiatives aimed at reducing European sustainability and due diligence reporting requirements. ECB President Christine Lagarde conveyed these concerns in a letter to European Parliament lawmakers.
This communication coincides with upcoming debates on the European Commission’s Omnibus I package, which seeks to alleviate the regulatory burden on companies by significantly altering several regulations. These include the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the Taxonomy Regulation, and the Carbon Border Adjustment Mechanism (CBAM).
One of the most notable changes proposed in the package is the reduction of the CSRD’s scope. It suggests limiting the regulation to companies with over 1,000 employees, as opposed to the current threshold of 250 employees. This change would exempt approximately 80% of companies from sustainability reporting requirements. Additionally, the package proposes that the CSDDD mandate full human rights and environmental due diligence only at the level of direct business partners, with less frequent monitoring.
Some lawmakers, including Parliament’s Omnibus rapporteur Jörgen Warborn, have advocated for even more significant reductions. Warborn has proposed raising the threshold for companies covered by the CSRD and CSDDD to those with over 3,000 employees and €450 million in revenue.
Lagarde highlighted the ECB’s recent efforts to integrate climate change considerations into its monetary policy framework. These efforts include accounting for climate risks in its collateral framework since 2022 and incorporating climate factors into national central banks’ creditworthiness assessments from 2024. The ECB also plans to introduce a “climate factor” within the Eurosystem’s collateral framework by 2026 to mitigate potential declines in collateral value due to climate-related transition shocks.
However, Lagarde emphasised the need for high-quality climate data to address climate change and environmental degradation effectively. She warned that the Omnibus package’s proposed changes might impact the ECB’s climate-related measures.
Specifically, Lagarde cautioned that reducing the CSRD’s scope could limit firm-level data availability, weakening the Eurosystem’s capacity to conduct detailed assessments of climate-related financial risks. She also noted that other proposed changes and delays to the CSRD and CSDDD could further impair the ECB’s ability to implement climate-focused initiatives.
“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,” Lagarde stated.
