ESG compliance challenges in the financial sector

The European Commissions’ Omnibus initiative, published on 26 February 2025, aimed to align and simplify the EU’s Sustainable Finance framework and to reduce reporting burdens. To ensure sustained and measurable efforts over the years ahead, the Commission set ambitious quantified targets for reducing reporting burden: at least 25% for all companies and at least 35% for SMEs. In addition, the EU Competitiveness Compass stated that the 25% and 35% burden reduction targets should, in the future, refer to the costs of all administrative burdens, and not only reporting requirements.

While general ESG requirements have been simplified, ESG requirements for the financial sector have remained broadly unchanged, which may pose challenges for banks. In view of this, the European Banking Federation (EBF) has repeatedly expressed its concerns. The EBF highlighted that while banks welcome and support the European Banking Authority’s (EBA) goal of integrating ESG risk considerations into the prudential framework and remain committed to strengthening their ESG risk management practices, they flag several areas where more time and flexibility is needed to address implementation challenges – including limited data availability, immature market methodologies and the need to upgrade internal processes.

The EBF stated that the EBA Guidelines were developed with reference to existing legislation such as the CSRD, ESRS, and CSDDD. However, these frameworks are undergoing substantial revision through the Omnibus review of the EU Sustainable Finance Package, with the aim of simplifying them as well as exempting certain undertakings from their scope. EBF warned that, as approximately 80% of firms (if not more) may now be excluded from the CSRD reporting scope, banks will receive considerably less structured ESG data from counterparties compared to expectations. This further restricts the availability of reliable, consistent and comparable information required for implementing the EBA Guidelines as intended.

Responding to the challenges faced by banks, on 6 August 2025 the EBA published a no-action letter on the application of the ESG Pillar 3 disclosure requirements under the EBA disclosure Implementing Technical Standards (ITS). This no-action letter aimed to address legal and operational uncertainties linked to the evolving ESG disclosure framework, in light of the proposed amendments under the European Commission’s Omnibus legislative package on sustainability reporting. However, this does not mean that the issue has been settled, so it is worth monitoring events related to the ESG framework.