Simplifying Sustainability - Or Surrendering It? How Europe’s ESG Rollback Undermines Ratings and Credibility

Green Central Banking’s recent analysis of the EU’s Omnibus Proposal deserves careful attention – not because it breaks news, but because it captures a deeper unease about the direction of EU sustainability governance. In their piece ‘EU regulators warn omnibus proposal could increase financial risk,’ they have captured something that extends far beyond technical regulatory adjustment. The EU’s sustainable omnibus package promises to simplify climate reporting requirements for companies, reducing the scope for 80% of firms, but what Green Central Banking reveals is a deeper tension between administrative convenience and systemic integrity.

This post offers a response to their arguments; not to disagree, but to extend and deepen them. Green Central Banking raises a crucial point: this isn’t just a recalibration of reporting scope. It may be the first visible crack in one of the EU’s few remaining pillars of policy coherence.

What the Omnibus Changes – and Why It Matters

The Omnibus Proposal aims to reduce disclosure requirements under the Corporate Sustainability Reporting Directive (CSRD), potentially exempting 75-80% of companies from mandatory sustainability reporting. The changes would raise thresholds so that only companies with more than 1,000 employees or revenue exceeding €50 million would face mandatory reporting requirements, with smaller firms able to report voluntarily.

The stated rationale is compelling and deserves recognition: reducing administrative burden on small and medium enterprises, improving proportionality in regulatory requirements, and addressing legitimate concerns about compliance costs. Business groups have welcomed these changes as necessary realism in the face of regulatory overreach. The European Commission has emphasized that the Omnibus represents simplification, not abandonment of the Green Deal agenda.

Humberto Delgado Rosa, director for biodiversity and environment at the European Commission, said during a panel at the Sustainable Investment Forum Europe conference in Paris that the simplification process doesn’t mean deregulation for the sake of less red tape: ‘The simplification agenda is a very legitimate one, one that aims to maintain competitiveness, because without it we would not be able to move towards sustainability.’

These are reasonable arguments, reflecting genuine tensions between regulatory ambition and economic practicality. But proportionality without visibility is a dangerous trade. The very firms seen as too small to report may still carry climate, supply chain, and governance risks that accumulate systemically.

What the Risks Really Mean

Green Central Banking has identified where this reasonable-sounding adjustment creates unreasonable systemic problems. As they report, the European Central Bank has cautioned the EU from drastically reducing the scope of the corporate sustainability reporting (CSRD) and due diligence directives (CSDDD), warning that the changes could increase risk for the economy, investors and the EU’s wider sustainable goals.

The ECB’s concern is precise and technical: with dramatically fewer companies providing standardized sustainability data, financial institutions will face what amounts to systematic blind spots in risk assessment. Vincent Vandeloise, senior researcher at Finance Watch, captures the paradox perfectly:

‘Today, financial lobbies welcome the omnibus package but tomorrow they will be back to complaining about data availability and the quality of the information communicated by their data providers.’

This matters because, as Green Central Banking notes, 70% of the banks reported that they rely on ESG ratings to manage their risks. When ESG ratings lose access to standardised data, they turn to estimates. The result: less coherence, less comparability, and greater risk across the financial system.

For ESG rating agencies, this isn’t a minor inconvenience. It undermines the scaffolding of comparative risk analysis. Ratings will become more model-dependent, less verifiable, and more prone to regulatory challenge – precisely at a time when banks, asset managers, and public bodies are integrating them into capital allocation. The ESG Rating Agencies are also now under the new regulatory regime created by the EU, which actively tries to prevent these issues.

The ECB is particularly concerned about the impact on third-country companies. The reduction in scope also means that a large number of third-country companies with operations in the EU would not be required to report, and the ECB recommend the threshold for other countries not be amended as it ‘increases the gap in data availability between Union and third-country undertakings, with negative consequences for financial institutions’ risk management’.

When ESG Becomes a Governance Crisis

What Green Central Banking has identified as a financial risk is something deeper: a governance coherence problem. The EU built its global sustainable finance credentials on regulatory innovation – the CSRD, the EU Taxonomy, the Sustainable Finance Disclosure Regulation – and on a narrative of leadership by example. These were not just technical instruments; they were statements about European values and institutional capacity.

Helena Viñes Fiestas, chair of the EU platform on sustainable finance and commissioner of the Spanish Financial Markets Authority, gets to the heart of this when she points out that going back to voluntary measures defeats the whole purpose of the legislation which is about comparability:

‘In my CV, I’m going to report the best, I’m not going to report certain things. [The voluntary sustainable reporting] is the same. Why would your company report on something that performed really badly? It is not mandatory, right?’

This creates a selective transparency problem that goes beyond data quality. When 80% of companies can choose what to report, the resulting information landscape will systematically favour larger, listed companies who were already subject to disclosure requirements. The market will have comprehensive data on some actors and patchy, voluntary data on most others. This is not just inefficient – it’s a form of selective regulatory coherence that weakens the credibility of sustainability assessments as a whole.

As Green Central Banking reports, this also would undermine other rules such as the ESG rating regulation which focused on governance and transparency from rating providers. The regulation assumes that transparency and access to data would encourage rating agencies to develop their offerings, but with fewer companies reporting under CSRD rating providers will instead divert ‘resources to fill data gaps, rather than enhancing their methodologies’. In effect, the EU has built a regulatory feedback loop – ratings assume data; data assumes compliance; compliance now assumes opt-in. The loop is breaking.

Fragility at the Heart of the Union

Here’s what makes this more than a sustainability story: the EU’s institutional strength has always rested on coherence rather than power – on its ability to act as one, especially around shared values and long-term priorities. The CSRD wasn’t just about climate data; it was proof that the EU could sustain ambitious, coordinated policy even when it was difficult.

This is not just a matter of political compromise. It reflects a deeper tension inside the EU – between its ambitions to lead globally on sustainability, and its structural vulnerability to internal lobbying, institutional fatigue, and fragmented commitment. If the EU cannot maintain its flagship sustainability framework under internal political pressure, what signal does this send about institutional resilience more broadly?

The ECB’s warning about physical and transition risks from climate change having ‘profound implications’ on price and financial stability points to why this matters systemically. ‘The availability of sustainability information is a minimum requirement to enable it to do so’, they note about their monetary policy responsibilities. In other words, the data infrastructure that the Omnibus Proposal would weaken is not a regulatory nice-to-have – it’s operationally essential for European financial stability.

This retreat sets a precedent. If ESG rules collapse under lobbying pressure, what’s to stop the same happening to other core priorities? The Clean Industrial Deal that the Commission references as justification for these changes will itself require sustained institutional commitment and data infrastructure. The Clean Industrial Deal will require ESG data at scale. To weaken that data while rolling out the Deal is to sabotage one agenda with another.

The Choice Ahead

The EU still has time to revise and refine this approach. The concerns raised by the ECB, the Dutch Authority for the Financial Markets, and the European Banking Authority represent just some of the institutional wisdom about the relationship between data infrastructure and systemic stability. These are not abstract regulatory preferences – they are practical warnings from the institutions responsible for European financial stability.

The ECB recommends the EU limit the reduction of the scope of companies covered by CSRD to 500 employees instead of 1,000. It also proposes any credit institution, regardless of size, that is a ‘significant institution’ be subject to CSRD ‘due to the importance of ensuring sufficient ESG data from the banking sector’. These are compromise positions that acknowledge the need for proportionality while maintaining systemic coherence.

The choice facing European policymakers is not between burdensome regulation and competitive simplicity. It’s between governance integrity and institutional expedience. As the ECB notes, harmonised, standardised, and reliable sustainability data will also help investors and facilitate capital, which is needed as the EU transitions to a green economy and puts its Clean Industrial Deal in place. Data infrastructure isn’t bureaucratic paperwork – it’s the foundation of institutional trust and market function.

Green Central Banking has done important work in highlighting these risks early, when there’s still time for institutional course correction. Their early intervention isn’t just timely – it may be the canary in the coal mine. The question now is whether policymakers will treat these warnings as technical inconveniences – or as signs of something deeper: a system under stress.

Europe’s reputation rests not just on what it regulates, but on what it refuses to abandon when the pressure builds.

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