ECB Chief Warns Against Weakening CSRD Rules

ECB President Christine Lagarde has issued a strong warning to European lawmakers about the potential weakening of the EU’s key sustainability reporting and due diligence rules. In a letter to European Parliament members, Lagarde stated that proposals to reduce corporate sustainability reporting obligations could hinder the ECB’s ability to examine and manage climate risks within the financial system.

This warning comes as lawmakers prepare to discuss the European Commission’s “Omnibus I” package. This package seeks to reduce reporting and regulatory burdens on companies and suggests significant changes to important sustainability frameworks like the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). Together, these regulations support the EU’s ambitious climate policy, promoting corporate accountability and ensuring financial institutions can handle climate-related risks effectively.

One of the most debated proposals in the Omnibus I package is the possible reduction of the CSRD. The current directive mandates sustainability reporting for companies with over 250 employees, covering a wide range of European businesses. However, the new proposal could raise the threshold to companies with more than 1,000 employees, which could exclude about 80% of current participants. For those that would still fall under its regulations, the reporting requirements would be less detailed, significantly lessening how companies report their environmental, social, and governance (ESG) performance.

The package aims to limit the CSDDD’s coverage as well, which currently requires companies to monitor human rights and environmental risks throughout their supply chains. Under the proposed changes, businesses would need to perform due diligence only for direct partners, not for entire supply chains. Moreover, the frequency of monitoring would decrease. Some lawmakers, including Jörgen Warborn, the Parliament’s Omnibus rapporteur, advocate for even greater cuts. Warborn has proposed raising the CSR and CSDDD thresholds to only include companies with more than 3,000 employees and €450 million in annual revenue. This would significantly narrow the regulations' reach.

Lagarde’s warning highlights the risks of these rollbacks to the ECB’s efforts in considering climate factors in its monetary and financial stability policies. Since 2022, the ECB has integrated climate-related risks into its operations. For instance, it has accounted for climate risks when determining haircuts in its collateral framework and integrated climate considerations in assessing the creditworthiness of collateral assets. In 2026, the Eurosystem will introduce a new “climate factor” in its collateral framework to protect the system against potential declines in asset values due to climate transition issues.

These strategies depend on access to reliable corporate-level sustainability data. In her letter, Lagarde emphasized that without sufficient high-quality climate disclosures from companies, the ECB cannot perform detailed assessments of risks to its balance sheet and collateral framework. She warned that narrowing the CSRD’s scope would greatly limit the availability of firm-level data, reducing the ECB’s ability to model and mitigate financial exposure to climate change.

Lagarde also expressed concerns about delays in implementing the CSRD and CSDDD, which are crucial to developing a solid data ecosystem for tracking climate and nature-related risks. The Omnibus I package, by weakening or postponing these frameworks, could jeopardize the ECB’s risk management capabilities and impede the EU's broader goals of promoting sustainable investments and achieving climate targets.

In her closing remarks, Lagarde recognized the need for reporting requirements to be manageable for companies, yet stressed that any changes to the sustainability framework should not compromise the financial system's climate risk management. “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,” she wrote.

Her intervention illustrates the growing tension within the EU, balancing the need to reduce regulatory burdens on businesses with the necessity of maintaining tools to protect the economy from the increasing risks of climate change and environmental harm. As Parliament debates the Omnibus I package, Lagarde’s warning is expected to spark renewed discussions about the involved trade-offs, emphasizing the key role of sustainability data in promoting environmental goals and ensuring the stability of Europe’s financial system.