The state of play for Europe’s sustainability regulation

European Parliament signed off on the final legal text of the EU’s Omnibus I at the beginning of December.

The update, provisionally agreed with member states earlier this month, will significantly scale back the scope and ambition of the Corporate Sustainability Reporting Directive (CSRD), Taxonomy Regulation and Corporate Sustainability Due Diligence Directive (CS3D).

The final agreement provides investors with some much-needed clarity after years of political and legal chaos about the three files, which most recently saw politicians assign decision-making power to far-right colleagues for the first time in the EU’s history.

While the newfound clarity on the Omnibus will be widely welcomed, negotiations on other key sustainable finance files have only just begun.

The European Commission last month tabled a legislative proposal outlining how it wants to redesign the Sustainable Finance Disclosure Regulation (SFDR), for example.

IPE wrote at the time about the changes the Commission is pushing for, and what they mean for Europe’s pension funds, but it will be up to Parliament and Council to decide whether they agree or want to make alternative updates.

PensionsEurope warned policymakers recently that the outcomes of the new Omnibus I agreement “must be fully integrated into the upcoming SFDR review to prevent inconsistencies between corporate reporting and financial sector disclosures”.

Such pressure from industry, along with the EU’s current political fragmentation, means there’s potential for the final SFDR revision to be quite different from what’s currently on the table.

Sustainability in IORP III

The same applies to updated rules governing Institutions for Occupational Retirement Provision (IORP III), which have recently been tabled.

As part of that legislative proposal, the Commission wants to strengthen the language around managing sustainability-related risks, and introduce requirements for pension funds to canvass their members on their sustainability preferences.

While the suggestions are likely to be rejected by those lawmakers keen on reducing the regulatory burden faced by Europe’s private sector and scaling back the emphasis on environmental and social issues, the Commission has tied both proposals to the SFDR and Taxonomy Regulation, which could placate those calling for more coherent rules for sustainable finance.

ESMA’s fund-naming rules

Which brings us on to fund-naming rules from the European Securities and Markets Authority (ESMA).

The plan to turn SFDR into a labelling regime will complicate ESMA’s rule that funds using sustainability-related terms in their names must allocate a certain amount of their capital to eligible assets.

If the SFDR proposal is accepted by Council and Parliament, it will introduce a parallel set of (lower) thresholds for the same funds.

So far, ESMA has been tight-lipped about whether it will ditch its rules to make space for the new SFDR, but a spokesperson recently told IPE the supervisor was “digesting” the Commission’s proposal.

“As preliminary remarks, we welcome the creation of new financial product categories,” she said, noting that ESMA had asked for such categories in its formal input into the SFDR review last year.

Taxonomy updates

Meanwhile, financial institutions have been busy providing their input into another of the Commission’s sustainability projects: an update to the green taxonomy.

A consultation closed last month, after receiving more than 400 responses.

It’s part of a wider overhaul of the framework, which will include the addition of new green activities and simplified ‘Do No Significant Harm’ criteria.

The Commission is expected to make its official proposals in the second quarter of 2026, informed by consultation feedback.

New advisory body

By that time, a new group of experts will have been appointed to help steer the process.

Having disbanded its previous Platform on Sustainable Finance earlier this year, the Commission has been slow to announce a replacement panel.

It launched a call for applications in July – right in the midst of reimagining the SFDR and Taxonomy, which the Platform has always advised – and insiders say a list of the new experts who will get to share the next phase could come any day now.

Attention turns to the real economy

But the biggest EU sustainability projects in 2026 won’t be on the finance side.

Co-legislators will turn their attention to another Omnibus: six new legislative proposals that seek to ‘simplify’ Europe’s environmental laws, including those related to industrial and agricultural emissions, batteries, electronic equipment, plastics and waste.

And there’s a new climate adaptation and resilience package on the table, which considers a wide-range of initiatives for real-economy companies, governments, insurers and impact investors.