The EU Taxonomy has long been criticised for its complexity and the heavy reporting burden it places on companies and investors. The EU sustainability reporting landscape is now evolving, with significant changes expected under the Omnibus Regulation. According to the European Commission, these updates aim to reduce the corporate reporting burden, improve financial alignment, and simplify compliance while maintaining the integrity of sustainable finance regulations.

These changes are not just technical adjustments: they reflect a broader effort to make sustainable finance more practical and accessible, with the risk of substantially downgrading the EU’s sustainability ambitions in the process, as explained in our previous article.

While the details remain uncertain until February 26, the EU Platform on Sustainable Finance has provided key recommendations that give us a glimpse of what to expect. Below, we break down the main areas of change and their implications for fund managers and portfolio companies.

1. Cutting the Reporting Burden

One of the most significant proposed changes is a one-third reduction in corporate reporting obligations. This is aimed at making EU Taxonomy reporting more efficient and less complex.

The key suggested updates include:

• Making OpEx KPI voluntary, except for R&D.

• Introducing materiality thresholds for reporting Turnover, OpEx, and CapEx KPIs.

• Better alignment with financial reporting.

• Simplified reporting templates, removing certain data points deemed unnecessary.

Under the current EU Taxonomy framework, companies must report Turnover, CapEx and OpEx. The OpEx KPI was designed to capture ongoing efforts toward sustainability, particularly activities that support the transition to greener business models but do not directly result in revenue or capital investment.

While making OpEx reporting voluntary reduces administrative burden, it also risks overlooking the transition efforts of companies that are not yet generating revenue from green activities but are actively working towards alignment. Investors who rely on a complete picture of sustainability efforts may find this change problematic.

The introduction of materiality thresholds and simplified reporting templates could have a significant impact on the EU Taxonomy framework. However, much depends on how these changes are implemented in practice. Since these adjustments are still mere suggestions, we will revisit this topic in detail once the official text is published.

2. Green Asset Ratio (GAR) Reform

The GAR is the key metric for financial entities under the EU Taxonomy, measuring the proportion of their assets (loans, bonds, equity holdings) that are aligned with the Taxonomy. The proposed changes aim to make it more practical:

• A symmetrical GAR.

• Simplified retail exposure reporting, focusing only on substantial contribution.

• Allowing estimates and proxies, with safe harbours to avoid greenwashing.

• Materiality applied to financial undertakings.

The GAR is meant to show how much of financial entities’ balance sheet supports sustainable activities. Currently, it requires a detailed breakdown of Taxonomy-eligible and aligned assets. Retail and SME exposures are included but can be difficult to assess due to data gaps.

Under the proposed amendments, the numerator (Taxonomy-aligned assets) and denominator (total assets) would have a more consistent composition, reducing discrepancies in how the GAR is calculated. This should improve comparability between financial institutions and make the metric more reliable for investors and regulators.

While the introduction of estimates and proxies would increase flexibility, it could reduce data accuracy and accountability, potentially allowing for looser interpretations of what qualifies as green.

The materiality threshold would apply to the combined KPI for financial institutions, meaning that immaterial business segments (not consolidated under the Accounting Directive) would be excluded from the GAR calculation. This could help focus reporting on significant exposures, but it also raises concerns about potential cherry-picking, where entities may omit certain activities from scrutiny.

3. Do No Significant Harm (DNSH) Criteria

The DNSH criteria are meant to ensure that sustainable activities don’t come at the expense of other environmental objectives. The proposed changes would:

• Introduce a lighter compliance assessment, reducing documentation requirements.

• Review DNSH criteria for usability and practicality.

• Apply a “comply or explain” approach for Turnover KPI assessments as a temporary measure.

These changes will make DNSH compliance more practical and less bureaucratic, but it could also mean less rigorous checks on whether a company’s activities truly avoid environmental harm.

This could encourage broader adoption, but if criteria are weakened too much, companies might have more room to disregard sustainability requirements. More precisely, we believe that the “comply or explain” approach to DNSH opens the door for companies to claim Taxonomy alignment while failing on key environmental safeguards. We lay down our reflections on this topic below.

4. SME Access to Sustainable Finance

SMEs have traditionally struggled with EU Taxonomy compliance due to resource constraints and the complexity of reporting requirements. The proposed changes include:

• A voluntary and simplified reporting approach for unlisted SMEs.

• A streamlined Taxonomy framework for listed SMEs.

One of the more welcomed changes is to make it easier for SMEs to engage with sustainable finance. For fund managers, this opens up new sustainable investment opportunities by making it easier to classify SME financing as green.

For SMEs, this is a positive step towards financial inclusion, allowing them to access green funding without being overwhelmed by complex reporting obligations. However, the success of this approach will depend on how simplified the requirements actually become. If the reporting remains too vague, investors may still hesitate to classify SME financing as sustainable.

Final Thoughts

There is no doubt that some adjustments are necessary. The EU Taxonomy, in its current form, is challenging to implement, and making it more practical is a logical step. This framework takes a one-size-fits-all approach and forces companies to report on aspects that may not be relevant to their business. Reducing unnecessary data points makes compliance easier and allows investors to focus on relevant information for decision-making.

But here’s the problem: Less reporting also means less transparency. A closer look at the proposed changes suggests that pragmatism might come at the cost of weakened sustainability reporting. The question remains: Are we sacrificing transparency and accountability for the sake of reducing red tape?

Making OpEx voluntary, for example, could significantly reduce visibility on operational sustainability efforts. The introduction of materiality thresholds is another red flag: while it makes sense to focus on financially relevant activities, it also creates a loophole for companies to avoid reporting on certain aspects of their business. This raises concerns about whether we’re moving towards more efficient reporting or simply lowering the bar.

For investors, this means less reliable sustainability data to base decisions on. If a company only discloses what it deems “material,” what happens to the full picture? This was already the case to some extent with the CSRD, and these changes will only feed this trend.

Estimates and proxies can help bridge data gaps, making it easier for financial institutions to report taxonomy alignment even when complete information isn’t available. However, it also introduces a level of subjectivity that could open the door to misrepresentation. Even with safe harbours in place, there is a real risk that sustainability claims become more about interpretation than fact.

For fund managers, this means they may have to work harder to verify the sustainability credentials of their portfolios. For companies, it means there may be less pressure to provide hard data. A shift that could dilute the integrity of green finance.

As mentioned above, the DNSH “comply or explain” approach also creates potential inconsistencies. If companies can explain why they have not met DNSH criteria, what’s to stop them from simply justifying non-compliance rather than improving their practices? Companies would be able to report that their activity is “aligned” without actually fulfilling all the requirements, making it harder to trust that a taxonomy-aligned company is truly sustainable, which was precisely the point of creating an EU Taxonomy in the first place.

For a more optimistic take, we strongly welcome the alignment of reporting data requirements for financial and non-financial entities. This creates an opportunity to streamline sustainability reporting across different regulatory frameworks, reducing double work and making data collection more efficient for both investors and portfolio companies. We have already been working on this by leveraging a single dataset that serves the needs of both fund managers (SFDR) and their portfolio companies (CSRD). Our approach recognises that there is significant overlap between the SFDR and CSRD disclosures, particularly in the quantitative sustainability metrics that companies and investors need to track. For more information, check this article.

We also welcome the introduction of the XBRL tagging system, which will make sustainability data more structured, efficient, and comparable across companies and financial entities.

Ultimately, the success of these changes will depend on how they are implemented and whether they strike the right balance between flexibility and integrity. Fund managers and portfolio companies should stay proactively engaged in understanding these developments and be ready to adapt once the final regulatory text is confirmed.

We will provide new updates when the Omnibus Proposal is released. Stay tuned!

Let us guide you through meaningful discussions and provide expert advice on how to align your investing strategies with sustainability reporting requirements, aiming not only for compliance but also for success in the evolving sustainability landscape.