Podcast: The European Central Bank's Omnibus opinion

The European Central Bank’s Omnibus opinion

25th June - 24 minutes

In this timely episode of Future in Focus, we sit down with the European Central Bank to discuss its official Omnibus opinion and why robust, high-quality sustainability data is critical, not only for corporate reporting and due diligence but also for the long-term stability of the EU’s financial system.

LRQA’s Theresa Gigov speaks with Katharina Klausch, Senior Legal Counsel at the ECB, on the future of sustainability regulation, including the role of Human Rights and Environmental Due Diligence (HREDD) in financial decision-making. As EU negotiations intensify, this conversation offers key insights for corporates and financial institutions navigating fast-moving changes.

Hello. Good morning, good afternoon, good evening, wherever you are in the world. A very warm welcome to LRQA Future in Focus podcast. My name is Holly Johnston, and I'm the Global External Communications Manager for LRQA. 

And as you know, it is my pleasure to host podcast episodes that explore emerging trends and critical issues shaping the future of all things risk management. 

In today's episode, I'm really excited about this one. We're diving into the fast-evolving world of sustainability regulation within the European Union, especially the recent Omnibus proposal. Now, you may have seen this in the headlines a lot recently, but for those less familiar, Omnibus is a proposed set of amendments aimed at simplifying and streamlining existing sustainability regulations. 

Within the EU, these developments could significantly impact corporate sustainability, reporting and due diligence expectations, so it's crucial we unpack what's happening and it's our pleasure to do that for you, our listeners.  

But today is going to be a little different. I am actually going to be handing over to my esteemed colleague, Theresa Gigov, who is the Associate Director for our sustainability consulting team in Europe. 

Theresa is going to be interviewing a very special guest, Katharina Klausch, who is the Senior Legal Counsel for the European Central Bank. 

Otherwise known as the ECB, it's an incredible honour for us to have you on this channel. Now let me stop there and let's get to the good stuff. Theresa, over to you to give our audience an introduction into yourself, our guest and to delve into the interview. 

Thank you so much, Holly. Welcome also from my side to this LRQA podcast, the European Central Bank's Omnibus opinion on why high-quality sustainability information matters for corporate sustainability and the wider stability of our financial system?  

My name is Theresa Gigov. As Holly said, I'm an Associate Director at LRQA and I'm part of our EMEA advisory team. We support multinational corporates with the development and implementation of sustainability strategies and, in particular, in the light of increasing regulation like the CSRD or the CSDDD. My personal focus is mainly around the social dimension of sustainability, in particular human rights due diligence.  

So, the European Commission published its Omnibus proposal in February 2025, as Holly said, designed to reduce complexity, ease reporting burden, create more streamlined approach to due diligence. The legal instruments and scope of the first Omnibus are the EU taxonomy, the CSRD, CSDDD and CBAM. 

So, so far the so-called “stop-the-clock-mechanism” is approved. This delays the entry into application of the CSRD wave two and three by two years and the CSDDD by one year. So many discussions and political interventions are ongoing from the complete deletion of regulation towards something in between. Last week the European Parliament has published its first draft report, and the Council has published the next iteration of its compromise text. 

So we still see many big topics that need to be negotiated, like the companies in scope, the adoption of climate transition plans, the due diligence focus and so on. But important to date the Omnibus legislative process is ongoing and current regulatory requirements are still in force. So the trilogue is expected to happen until the end of the year and we can't expect any agreement before early 2026, at least from today's point of view. 

I have to say that because it's changing really on a daily basis, so we'll see. The debate is accelerating and really on fire and this means it's a really good timing to share important views and opinions to contribute to this process in a meaningful way. 

In the light of this regulatory uncertainty, also the ECB has shared its opinion on the Omnibus proposal with the public advocating for a well calibrated sustainability reporting, which retains the benefits for the economy and financial system while supporting competitiveness and the Union's climate targets. The ECB also encourages the legislator to agree fast in order to provide legal certainty. 

So we are very pleased to speak today to one of the authors to understand more about the ECB’s opinion on what this could mean for corporates and sustainability managers. I'm delighted to have today, Katharina Klausch with me. She's a Senior Legal Counsel at the ECB’s banking supervision with a focus on sustainability and was part of developing this opinion. We know each other for around 13 years and I'm personally so excited to record this podcast on this important topic with you today. Welcome, Katharina. 

Hello, Theresa and thank you for having me. 

Great. So with the first question to you, Katharina, I really would like to go one step back and draw the bigger picture. What is actually the role of the ECB in sustainability and what is your mandate in this space? 

Yes. Thank you, Theresa. That's actually a good question. So indeed, I was a member of the drafting panel for this opinion together with many other colleagues, and I'm happy to see the interest in this opinion. I'm also happy to answer the questions with my personal views, which do not necessarily reflect official positions of the ECB.  

So you asked for the big picture. ESG and sustainability topics seem to be out of fashion for a while already. 

While competitiveness and geopolitical risks are the talk of town. In my view, the EU Green Deal and Competitiveness Compass can complement each other, but let me explain. 

Firstly, high quality ESG data is of importance for the economy and the market participants. It enables data analysis to assess ESG impacts and effects of companies from business model to products to value chains. 

These analyses can lead to making the right strategic choices and investments because they do reveal areas with the highest potential and thus opportunities in an effort to become carbon neutral. 

Secondly, ESG data and reporting of those enable technological innovation and efficiency increase in the use of non-renewable resources. Also, climate change won't go away, it's scientifically proven. 

So to come to your question, the ECB’s mandate is sustainability and climate and nature risks can affect how central banks can discharge or perform on their mandates. So for example, firstly, the ECB’s mandate in banking supervision is to supervise the risks banks are exposed to and to contribute to the safety and soundness of banks, and the stability of the financial system. 

Financial risks from ESG factors need to be identified. They need to be measured and they need to be managed properly by banks in the short, medium and long term. The ECB needs to supervise and ensure this by testing banks resilience to long term negative effects and impacts. 

When looking at the central bank side, the Central Bank has to determine the appropriate monetary policy stance and it has to deliver on its mandate on its stability mandate for prices. And since 2021, so the strategy review, the ECB included climate and nature related aspects into its monetary policy tools. 

And thirdly, the ECB, as part of the European Systemic Risk Board, has to monitor and address the impact of sustainability risks on the EU financial system. 

Thank you, Katharina for setting the scene. I think this is quite important for the start of this podcast. So let's look at the recent developments in early May of this year, the ECB has published its opinion on the Omnibus proposal, including some specific technical observations and suggestions for Brussels. So I was wondering, why does the ECB publish its Omnibus opinion at all? And what are your key points? It would be great if you could share that with us. 

Sure. So, the ECB decided to deliver its own opinion on own initiative, which it can do whenever legislation touches upon its field of competence. 

And first of all, the ECB supports the Commission's effort to simplify the framework and reporting. It's however, important to strike the right balance between simplification on the one hand, and, on the other hand, ensuring that the benefits of sustainability reporting are not lost. 

I think we are here totally aligned to strike this right balance also from a corporate perspective. But as we all know, the devil lies in the details here. So what are your main observations? 

Yes. So the ECB made all together 8 main observations. I will explain on those. So the first one is the revised scope of the CSRD reporting obligation. The ECB opinion pointed out that there's some drawbacks on the proposed scope reduction to only include companies with on average above 1000 employees. The current scope of CSRD is estimated to cover only about 37% of CO2 emissions produced by undertakings in the Union so you can do the mathematics if we take out a lot of those companies from scope. 

Further, the ECB proposed an inbetween category of companies of so-called medium large undertakings. Those are companies with an average of plus 500 employees and also the other usual thresholds for large corporates of net turnover above EUR 50 million or balance sheet total above EUR 25,000,000. 

These medium large undertakings should report in accordance with simplified standards and also include all significant institutions which are under direct ECB supervision. 

Secondly, the ECB opined or commented on the voluntary reporting standards. 

It highlighted the drawbacks if reporting population is too large and diverse in terms of size and complexity, such as self-selection bias, risks of greenwashing, but also no limited assurance audits and limited comparability and quality of data. 

And thirdly, there's the value chain cap. So all companies above 1000 employees cannot ask for more information from smaller out-of-scope companies than contained in the voluntary standards. 

And the ECB believes there needs to be a clarification that this cap doesn't prevent companies from requesting sustainability information for other purposes than CSRD. 

And 4th we have the European sustainability reporting standards and here we recommended to retain the topical standards on climate and biodiversity, so the ESRS  E1 and E4 and to streamline the other ones, but also the ECB points out the importance of interoperability with international standards. 

Great. Thank you. And what about auditing? I mean, our experience of the last year was corporates under wave one of the CSRD was, that the auditing process took more time and internal resources at corporates than actually expected. So it was a very intense phase for corporates with many meetings, it seemed like difficult for all parties to find a proportionate approach towards quality and depth of data. We also even watched or witnessed, big differences between auditors. So and this can be I think really tricky when we are thriving for a level playing field. 

Yes, you're right. So also on the importance of auditing, the ECB recommended that the Commission adopts at least guidelines on limited assurance, which are followed as soon as possible, by binding rules, and also recommends the retention of the review option to upgrade to reasonable assurance. 

And on the factor specific standards, the ECB recalls the benefits of retaining Commission's power to adopt sector specific standards, and if that's not possible,  encouraged the Commission to adopt at least sector specific guidelines to foster this common approach for the ESRS implementation in individual sectors. 

Thank you for sharing this first six points. So they were all related to the CSRD or the Corporate Sustainability Reporting Directive. But what does the ECB opinion actually say about the CSDDD, the Corporate Sustainability Due Diligence Directive because that is actually about the doing, about conducting due diligence. This means identifying, preventing and remediating adverse impacts on people and the environment. 

Yes, you're fully right. So on the CSDDD, the ECB recommended to keep not only the obligation to adopt the transition plan, but also to implement it. And I mean, this is really important.  

And also there's a review clause for the financial sector and we advocated to keep this but with a bit of a longer deadline, but to keep it. 

That's great. Thank you for sharing that overview with us. So understanding from you now that high quality sustainability related information is essential for the ECB, to fulfil its mandate with regard to banking supervision, financial stability, monetary policy and statistics,  

I would like to explore with you what this actually means for banks as well as sustainability professionals in multinational corporates. So my question is, what does it mean for banks to gather and provide high quality sustainability information and what impact does this have in turn on multinational corporates that are clients of those banks needing finance and investment? 

Yes, very good question. So sufficiently granular and comparable and reliable sustainability data, so high quality data on firm level is important information source for banks in order to be able to identify and measure and manage the risks related to sustainability. So from a supervisor's perspective, this is important for enhancing the safety and the soundness of banks and the stability  of the financial system. 

So if we want banks to decarbonise their portfolios, they need high quality sustainability data in order to have the right conversations with their corporate borrowers and they need to be able to finance their transition to net zero. 

But also for the corporates, it is important that their banks do not approach them with individual questionnaires on sustainability information, but with standardised requests, because otherwise the burden can easily shift from being a bureaucratic burden to being a financing burden.  

So from a central bank view the reduction of scope of undertakings subject to CSRD sustainability reporting would limit the ability to have firm level data and thereby weaken the Eurosystem's ability to perform a granular assessment of climate related risks on the monetary policy operations. 

I think this is a very important point. So the high quality sustainability data is on the one hand important for banks to manage their related risks, but also for the wider stability of our financial system. It's also the basis, I think, to finance the sustainability transition of our economy by channelling the money into the right direction. 

So in my last question to you, Katharina, I would like to briefly touch on the social dimension of sustainability. 

At LRQA Advisory and Assessment, we use for our work with multinational corporates on the implementation of HREDD robust data, our own so-called EiQ tool provides to us with around 25,000 audits per year, our assessment team delivers. It is also combined with other civil society indices like the Global Slavery Index, by the Walk Free Foundation or the Children's Rights in the Workplace Index. 

This all shows us major adverse impacts on people in the deeper value chain of corporates, important here to note, we have to distinguish between two risk perspectives, which is very often mixed up: so adverse impacts on people versus then risks for the business like applied in the double neutrality approach under the CSRD. So we support daily companies in identifying those adverse impacts on people and support them also in understanding what business risks can result from, like supply chain disruption and related operational consequences, high reputational damage with potential decreasing sales numbers, lawsuits, remediation costs and so on and so on. So the Omnibus proposal by the European Commission includes also the option for corporates to only focus their HREDD approach on Tier 1 suppliers. And I personally see this as a very risky proposal because actually the worst adverse impacts are deeper in the value chain and can result in high risks for corporates that should be identified proactively and mitigated along with side with international standards like the UN Guiding Principles for Business and human Rights that also form the basis for the CSDDD. 

So the social dimension of sustainability is not yet very prominent in the European Central Bank's Omnibus opinion, but you advocate for the financial sector to retain in scope of the CSDDD. This would mean they need to conduct human rights and environmental due diligence. 

Which would in turn, as we heard earlier today, also impact their corporate clients. So why do you not yet focus so much on the social dimension of sustainability and why do you think it's important for banks to conduct HREDD under the CSDDD? 

So the ECB is currently interested more in the physical and transition risks because of the concrete financial impact it has on banks. 

There's quite some climate change related litigation against corporates, but also governments and banks ongoing. However, there's not so much litigation against textile producers based on human rights breaches. How human rights breaches translate into financial risks for banks is difficult to quantify at the moment. 

And also there's not so much data and information on social risks available yet. 

 The CSDDD, or as regards the CSDDD, the ECB recommends to retain the review clause for the financial sector, which means that the financial sector would be included in the sustainability due diligence with tailored requirements.  

So for example, this means on the provision of financial services, and investment activities and this means that HREDD needs to be conducted and will have impact on corporates. For example, HREDD for finance projects, corporates need to provide information to banks on potential or actual adverse impacts on people regarding business activities they want to finance or invest in.  

The reason to include the financial sector is that from our point of view, the financial undertakings should not be treated differently from companies in other sectors. This also true for CSDDD, because in order for private finance or banks to effectively manage risks and support the green transition of the real economy, it is crucial that regulatory and legislative requirements are consistent across sectors.

So in particular, the CSDDD due diligence requirements can help to ensure that banks systematically integrate sustainability matters into their decision making and their risk management.

And also this helps to create legal certainty for banks on the legal obligations in this area and around climate and environment related litigation risks for the financial sector.

Alright, thank you for sharing this. I just would like to add from my perspective, that I also see the data on how adverse social impacts can turn into risks for corporates already increasing. Like for example, the case of a luxury brand that pays $2.3 million to help victims of labour exploitation after an investigation. So definitely something to watch. 

So many thanks for presenting the ECB opinion on Omnibus for us and sharing your thoughts on this. I think it brought some more clarity and created a wider understanding why sustainability related information and harmonised frameworks are not only important from a business perspective, but also from a wider financial market perspective. I really personally hope this will equip some sustainability professionals for the next conversation with their CFO. 

And with this over to you Holly.

Thank you both Katharina and Theresa, so much for this genuinely insightful discussion. A real deep dive for our listeners. And you know, I love the fact that you've both known each other and had a professional relationship for so long, both against the backdrop of short term twists and turns of sustainability regulation, but also the long term enduring relationship between sustainability, data and actually the health of our entire financial system.

I hope today's episode has given our listeners from business leaders to risk managers to sustainability professionals, valuable context, as you say, Theresa, for their next boardroom meeting, and especially from a really unique guest from the European Central Bank.

But more than anything, I want to thank our listeners for coming back to LRQA’s Future in Focus podcast time and time again. You can find all of our other episodes on all aspects of risk management on our website at lrqa.com or on Spotify. So until next time, thank you again to our guests and to our listeners.

Stay curious, stay informed and stay committed. Thanks everyone.