2025 was marked by regulatory volatility and simplification efforts in the EU, with the European Commission announcing 10 omnibus packages to reduce regulatory burdens and boost competitiveness. These covered sustainability, chemicals, defence, digital, agriculture, and more.
Photo credit: DPAM
Ophelie Mortier, Chief Sustainable Investment Officer
The European Union’s regulatory environment for sustainable finance continues to evolve rapidly, with significant developments in the Sustainable Finance Disclosure Regulation (SFDR), following the Omnibus regulation on the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). What are the implications for financial institutions and corporates, and the broader context shaping the future of ESG (Environmental, Social, and Governance) integration in Europe?
CSRD versus CSDDD: scope, thresholds, and strategic impact
The finalisation of the CSRD and CSDDD, together with the Omnibus simplification, represents a pivotal milestone for sustainability regulation in the European Union. While both directives are designed to enhance corporate accountability, their scopes and criteria intentionally differ - this strategic choice aims to limit the number of companies subject to the more rigorous requirements of the CSDDD.
So, what are the rules for each directive?
- CSRD: Focuses on sustainability reporting and applies to large EU companies and certain non-EU parent companies. The thresholds are set at 1,000 or more employees and at least €450 million in net annual turnover. The directive will first apply to fiscal years starting on or after January 2027, with reporting required in 2028.
- CSDDD: Targets due diligence regarding human rights and environmental impacts. It covers very large EU companies and certain non-EU entities, with higher thresholds - 5,000 or more employees and at least €1.5 billion in turnover. Obligations will begin in July 2029, with penalties that can reach up to 3% of net worldwide turnover.
Key differences between the directives include how non-EU companies are treated, the nature and extent of penalties, and the approaches to exemptions and civil liability. The lack of harmonisation in scope and criteria presents challenges for implementation. Additionally, as both the CSRD and CSDDD have significantly narrowed their scope, there will remain great dependence on ESG data providers to fill in the gaps, using estimates and extrapolations to address the resulting information gaps.
It is uncertain whether VSMEs (Voluntary disclosures for Small and Medium-sized Enterprises) will be a comprehensive solution, but their adoption should be encouraged wherever possible. As a reminder, VSME refers to voluntary sustainability disclosures by SMEs, which are not legally required to report under CSRD. These simplified standards allow SMEs to demonstrate their commitment to ESG practices, improve transparency for stakeholders and prepare for future regulatory requirements, without the immediate burden of mandatory reporting.
SFDR simplification - the other side of the coin of the Omnibus
The three categories were largely expected. The simplification – or rather the reduction – of the scope much less likely. An important simplification to note is that portfolio management services and investment advice are excluded from scope, with exemptions for certain alternative and closed-ended funds.
Major adjustments include:
- Removal of the sustainable investment product category and the Principal Adverse Impact (PAI) entity-level requirements.
- Elimination of the ‘Do No Significant Harm’ (DNSH) principle for certain exclusions, and integration of good governance into broader exclusion criteria.
- Taxonomy alignment reporting is now required only for products categorised as ‘Transition’ or ‘Sustainable’ with an environmental objective.
A new product categorisation - Transition, ESG Basics, and Sustainable has been introduced, as noted in our previous update. Each category now requires a minimum investment threshold of 70%. Notably, this threshold for the Sustainable category could conflict with ESMA’s guidelines on funds’ names, which set a lower minimum of 50%, potentially causing immediate challenges for the fund industry.
Additionally, in the case of the Transition category, the exclusions - particularly those stipulating ‘no new projects’ - effectively exclude nearly the entire energy sector from qualifying. How these criteria will be interpreted, debated and potentially revised remains to be seen, and will be a key area to watch as negotiations continue.
To note, ESMA’s guidelines on funds’ names have already impacted the fund industry. Research, published by ESMA on December 17, highlighted the significant impact of its guidelines on ESG and sustainability-related fund naming. Most affected funds either removed ESG terms from their names or updated investment policies, primarily by excluding fossil fuels, to comply with new standards. Funds with higher fossil fuel exposure were more likely to drop ESG terminology, while those retaining such terms actively reduced fossil fuel holdings.
Regulatory pushback: environmental standards under pressure
Recent regulatory developments reflect a trend toward easing certain environmental and climate regulations, both at EU and national levels. For example:
- On December 16, 2025, the EU Commission proposed measures to streamline food and feed safety legislation, including faster market access for bio-pesticides and more efficient renewal procedures. While some steps were welcomed, critics argue that indefinite approval for most pesticides could undermine scientific reassessment and increase health and environmental risks.
- In Germany, draft legislation suggests scrapping energy demand reduction targets, aiming to cut costs for companies by approximately €834 million annually. This signals a broader trend of prioritising economic growth over climate commitments across Europe.
The pragmatic turn in sustainable finance
Despite this trend, the challenges of sustainability have not diminished; in fact, they have intensified. The ongoing debate about whether the term ‘ESG’ has become a dirty word or if ‘sustainable’ should be removed from all contexts often overshadows the fundamental issue: the necessity for demonstrable progress in building resilient organisations. Despite evolving political and regulatory environments, climate risks, operational disruptions and heightened investor expectations continue to be urgent concerns.
Recent events illustrate the gravity of these challenges. For the sixth consecutive year, insured losses from global natural catastrophes exceeded USD 100 billion, with the Swiss Re Institute reporting a USD 107 billion total for 2025, even though the US was spared from any hurricanes making landfall. This ongoing trend highlights the increasing property damage linked to climate change and extreme weather. In another example, more than 450 individuals are suing the Japanese government, claiming its climate targets fall short of commitments to limit global temperature rise to 1.5°C above pre-industrial levels, underscoring the growing demand for credible climate action worldwide.
CBAM: a new era for EU climate policy
The full operationalisation of the Carbon Border Adjustment Mechanism (CBAM) from January 1, 2026, represents a milestone in EU climate policy. CBAM aims to level the playing field for European industries by imposing equivalent carbon costs on imported goods, reducing the risk of carbon leakage, and incentivising global decarbonisation.
However, CBAM also raises concerns about trade tensions, administrative complexity and potential impacts on developing countries’ access to EU markets. Its success will depend on careful design, transparent enforcement and ongoing dialogue with global partners.
Additionally, the EU Deforestation Regulation (EUDR) will take effect on December 30, 2026, providing micro and small operators with an additional six-month transition period.
Conclusion: resilience as the core imperative
The CSRD, CSDDD, and SFDR reforms will significantly reshape the scope and requirements for corporate sustainability and finance disclosure, raising thresholds and reducing the reporting burden for many companies.
The CBAM and the EUDR will have material impacts on trade and supply chains, with the CBAM introducing carbon costs on imports and the EUDR enforcing deforestation-free supply chains from late 2026.
The evolving EU regulatory landscape highlights resilience as the central theme for sustainable finance, emphasising that organisations embedding sustainability as a core business imperative, beyond mere compliance or semantics, will be better equipped to manage risk, create long-term value and stay competitive in an unpredictable environment. As regulations shift, financial institutions face both challenges and opportunities and must proactively invest in data, systems and expertise to meet new standards, integrate sustainability into business processes and uphold transparency and credibility for regulators and investors. Those institutions that adapt and embrace these changes will be best positioned to manage risk, seize new opportunities and deliver lasting value in a dynamic market where credible climate action and adaptive strategies remain essential.
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DPAM - Degroof Petercam Asset Management
DPAM - Degroof Petercam Asset Management
