The European Commission's recent Omnibus proposal has introduced sweeping changes to sustainability reporting and due diligence regulations. While the intention is to cut red tape, streamline compliance, and enhance competitiveness, these changes come with significant implications for the banking sector.
One of the most notable shifts in the proposal is the drastic reduction in sustainability reporting requirements. Under the revised rules, 80% of companies have been removed from the scope of the Corporate Sustainability Reporting Directive (CSRD).
These exemptions apply to smaller companies, with fewer than 250 employees, and companies not meeting certain revenue thresholds (usually under €40 million). The removal of these companies means that banks will have access to far less standardised sustainability data, potentially complicating efforts to assess environmental and social risks when making lending and investment decisions.
Additionally, due diligence requirements have been simplified, now primarily focusing on direct business partners. While this reduction in complexity eases the compliance burden for companies, it may limit banks' ability to track ESG-related risks throughout entire supply chains, leaving some blind spots in their risk assessments.
Although the Omnibus proposal is an EU initiative, it will directly affect Norwegian banks due to Norway’s participation in the European Economic Area (EEA). Norwegian financial institutions must comply with the revised sustainability reporting and due diligence regulations. The reduced scope of the CSRD and the simplification of due diligence requirements will present challenges in obtaining standardized sustainability data and tracking ESG risks, requiring Norwegian banks to adapt their internal systems to ensure they remain aligned with both EU and global sustainability standards.
Despite these regulatory changes, banks must recognise that the green transition remains a profitable opportunity. Climate risks and transition risks have not diminished. The 2030 and 2050 sustainability deadlines are fast approaching, and banks that integrate climate considerations into their lending and investment strategies can position themselves for long-term success. At the same time, they can help mitigate financial, regulatory, and reputational risks that may arise from overlooking climate-related factors in their decisions.
While the regulatory burden may have been eased, the need for robust due diligence has never been more critical. Even though oversight has been reduced, the reality is that climate and transition risks continue to pose significant challenges for businesses. Banks still have their net-zero commitments to meet, and their portfolios must reflect this ambition. Institutions should continue to evaluate their lendees carefully, particularly in sectors that are most exposed to environmental risks or those transitioning to more sustainable practices. By ensuring due diligence is maintained at a high standard, banks can continue to support the green transition and safeguard against future liabilities.
While reducing bureaucracy can benefit certain aspects of economic growth, the long-term implications for sustainability remain uncertain. Banks may need to take proactive measures to maintain transparency in their operations and continue supporting climate goals despite the reduced regulatory oversight. By doing so, they can strike the right balance between simplified compliance and their ongoing commitment to sustainability.
Check out the full EU Omnibus proposal here.