As European lawmakers consider sweeping changes to sustainability regulations, European Central Bank (ECB) President Christine Lagarde has issued a clear warning: watering down key sustainability reporting and due diligence directives could impair the ECB’s ability to manage climate-related financial risks.

Sustainability Rollbacks Could Undermine Climate Risk Oversight

In a letter addressed to members of the European Parliament, Lagarde outlined concerns about the upcoming Omnibus I legislative package, which aims to reduce regulatory burdens on companies. Among the central proposals is a significant scale-back of the Corporate Sustainability Reporting Directive (CSRD). The threshold for companies required to report under the CSRD would rise from 250 to over 1,000 employees. This change alone would remove nearly 80 percent of companies currently within the directive’s scope.

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Other proposed rollbacks include loosening the Corporate Sustainability Due Diligence Directive (CSDDD), which would reduce the requirements for companies to conduct human rights and environmental due diligence. If passed, businesses would only need to examine their direct suppliers rather than full value chains, and the frequency of due diligence assessments would be reduced.

ECB’s Climate Strategy Relies on Transparent Data

Lagarde emphasized that the ECB has taken multiple steps to integrate climate considerations into its monetary and risk management frameworks. Since 2022, climate risks have influenced how the central bank calculates haircuts in its collateral framework. In 2024, national central banks began factoring in climate risks when assessing the creditworthiness of financial instruments used as collateral. And starting in 2026, the ECB plans to apply a “climate factor” within its collateral system to guard against sudden drops in asset value due to climate-related transition shocks.

However, these efforts rely heavily on access to reliable, standardized, and company-level climate disclosures. The ECB president cautioned that the proposed changes in the Omnibus package would reduce the availability and quality of such data, undermining the ECB’s ability to assess financial risks related to climate and environmental degradation accurately.

Smaller Scope, Bigger Consequences

Lagarde’s letter specifically called out the proposal to raise the CSRD threshold as a direct threat to the integrity of the ECB’s risk assessments. Without sufficient firm-level climate data, she warned, the Eurosystem would struggle to carry out detailed evaluations of climate risks tied to its balance sheet and collateral operations.

She also expressed concern about delays and scope reductions within the CSDDD, explaining that this would similarly impair the ECB’s ability to promote sustainability and resilience within the financial system.

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A Call for Balanced Reform

While acknowledging the desire to reduce burdens on businesses, Lagarde urged lawmakers to ensure that any reforms preserve the core value of sustainability disclosures for both the economy and the financial sector. In her words, the regulatory changes should “strike the right balance” between easing compliance for companies and retaining the tools necessary to manage long-term financial stability amid growing climate threats.

Lagarde’s intervention reflects broader anxieties within the European financial community. With climate change increasingly recognized as a systemic financial risk, institutions like the ECB depend on robust sustainability frameworks to inform policy and safeguard economic resilience. Stripping those frameworks of their reach and rigor could leave blind spots in critical areas.

Looking Ahead

As the European Parliament prepares to deliberate the Omnibus I package, Lagarde’s message serves as both a warning and a call for foresight. With rising climate volatility and economic uncertainty, the value of consistent, transparent, and comprehensive sustainability reporting cannot be overstated. The decisions lawmakers make in the coming weeks may shape Europe’s financial climate readiness for years to come.

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