European 2025 Sustainability Trends and What We Expect in 2026

In our article last year 2024 sustainability trends and what we expect in 2025, we concluded that 2024 marked significant progress in the EU´s sustainable finance regulatory framework with the adoption and implementation of key legislation aimed at integrating sustainability into financial practices, enhance transparency and combat greenwashing and that we expected 2025 to be the year of implementation and assessment of the practical impact of this newly adopted legislation. We also remarked that the primary challenge Europe faced was balancing the burden of regulatory requirements and fostering a pro-business competitive environment.

2025 turned out to be the year the EU focused on balancing the need for transparency and the burden of reporting requirements by simplifying most of the sustainability norms previously adopted, raising a debate as to the future of transparency and reporting in sustainable finance and the role of sustainable finance in the EU competitiveness strategy.

This post examines the 2025 and the 2026 measures, concluding that, despite the discussions surrounding the Omnibus I reform and the reduced scope of the Corporate Sustainability Reporting Directive (“CSRD”) and the Corporate Sustainability Due Diligence Directive (“CS3D”), the enforcement of stricter criteria for labeling and marketing sustainable products, the elevated standards for entities assessing ESG labels, and the rigorous requirements for sustainability-related products, underscore that sustainability and the prevention of greenwashing continue to be central pillars of the European competitive strategy.

The European Parliament approved the Omnibus I reform in December 2025 (see Approval of Omnibus I.). The most consequential changes were to CSRD’s timing, scope, and content. A “Stop the Clock” measure deferred the application of later CSRD phases by two years, easing near-term pressure on companies that would otherwise have entered scope sooner although, foreseeably, they could cease to be subject to CSRD (see Approval of “Stop the Clock Directive: impact on business). Finally, Omnibus I substantially recalibrated CSRD’s scope excluding an estimated 90% of companies previously in scope, and narrowed mandatory reporting for undertakings remaining within it, while introducing clearer, lighter regimes for those voluntarily making sustainability claims. In addition to timing and scope, the Commission advanced a simplification of European Sustainability Reporting Standards (“ESRS”) (see Omnibus I: ESRS Quick Fix). EFRAG delivered streamlined drafts in mid-2025, trimming data points and narrative requirements, with formal adoption expected in 2026 for use from the 2027 financial year. The decision to set aside sector-specific ESRS under Omnibus further reduced complexity, addressing repeated concerns from stakeholders about practicality and cost. In parallel, the EU Taxonomy’s Article 8 disclosures were simplified and, from 2026 in respect of the 2025 financial year, made proportionate by exempting non-material activities and streamlining templates (see Omnibus I: Commission approves simplification of taxonomy).

CS3D also moved from staged thresholds to a more focused regime concentrated on the largest companies and those with significant EU activity. While the original directive contemplated phased-in obligations for successively smaller enterprises, the Omnibus set a later single application date in 2029 and tightened the qualifying criteria. The combined effect is a material reduction in the number of companies directly in scope in the near term, while preserving the directive’s ambitions for climate transition plans and value-chain due diligence for the largest market actors (see New CS3D: risk-based approach).

The application of the EU Deforestation Regulation has been further postponed to 30 December 2026, with an additional six-month extension for small and micro-operators not covered by EU Timber Regulation (“EUTR”), to ensure adequate readiness across value chains.

Lastly, the EU Parliament adopted Regulation (EU) 2025/2083 to simplify the Carbon Border Adjustment Mechanism which will start applying from 1 January 2026 (see Simplifying and strengthening Carbon Border Adjustment Mechanism).

Despite discussions around sustainability "deregulation", the EU pushed forward with key legislative measures and market standards designed to enhance transparency, emphasizing sustainability, stricter label usage, and their roles in shaping the EU's competitive and future economy. 

In debt capital markets, issuers started using the EU Green Bond label (see The EU Parliament and the Council approve the EU Green Bonds Regulation), and the EU Commission progressed in developing the EU Green Bond infrastructure including publishing disclosure templates for pre- and post-issuance disclosures for bonds markets as environmentally sustainable or sustainability-linked bonds (see The European Commission published draft delegated regulations under the European Green Bond Regulation and opens the consultation period). Furthermore, in response to market needs for transition finance, the International Capital Market Association (ICMA) introduced guidelines for a Climate Transition Bond label, (see Transition finance: from concept to market practice).

Guidelines issued by the European Securities and Markets Authority (“ESMA”) on the use of ESG or sustainability terms in fund names became effective in May 2025 (see Guidelines on funds´ names using ESG or sustainability-related terms), triggering a wave of fund name adjustments. This move underpinned a more transparent and disciplined approach to sustainability labelling in financial products. Furthermore, the EU Commission proposed the largely anticipated SFDR 2.0, simplifying sustainable finance disclosures and replacing Article 8 and 9 labels with three voluntary product categories: Sustainable, Transition, and ESG Basic. This step signifies a concerted effort toward clarity in regulatory mechanisms (see SFDR 2.0: Towards greater clarity).

Another notable milestone was the European Council's adoption of the first binding convention targeting environmental crime via criminal law, complementing the EU Environmental Crime Directive. This enhanced cross-border cooperation and introduced minimum legislative standards to tackle environmental offences (see New Criminal Directive: an opportunity for environmental leadership?)

The initiatives planned for 2026 reflect the EU's commitment to ensuring that sustainability claims are backed by reliable and verifiable substance. Transparency remains central to this strategy.

EU Green Bond External Reviewer Regime: By June 21, 2026, external reviewers for EU Green Bonds must be registered and supervised by ESMA. This measure guarantees the qualifications and independence of reviewers, thereby strengthening trust in green bond assessments. We will also see whether this will have a knock-on effect, and registered reviewers will be largely used to review sustainability labelled financial products issued outside the EU Green Bond label.

ESG Rating Regulation: operational from July 2026 establishes a supervised regime under ESMA for ESG ratings providers, enhancing the reliability, governance and conflict management of ESG methodologies (see EU have adopted a regulation to enhance the transparency and integrity of ESG rating activities).

Low Carbon Benchmark Regulation: effective January 2026 amends the Benchmark Regulation by requiring benchmark referencing ESG factors in legal or marketing documents to explain how critical elements of their methodologies reflect ESG factors.

Listing Act changes to the Prospectus Regulation: From June 2026, where available sustainability reports are to be incorporated by reference in Prospectuses. Additionally certain information concerning sustainability will be required to be disclosed in Prospectuses (see Changes to the Prospectus Regulation made by the Listing Act).

Greenwashing Directive: Following its 2024 adoption, national transposition is required by March 2026, with application from September 2026. The Directive prohibits generic environmental claims without substantiation, regulates sustainability labelling, and addresses durability claims and marketing practices aimed at preventing greenwashing across the single market.

Eco-design Regulation: Starting July 2026, certain provisions of the Eco-design Regulation will apply, focusing on the reduction of environmental impacts throughout product lifecycles and introducing restrictions on the destruction of unsold goods (see EU publishes eco-design regulation).

Transposition of the EU Energy Performance of Buildings Directive: Member States are required to integrate this directive into national laws by May 2026.

Transposition of the EU Industrial Emissions Directive 2.0: Member States are required to integrate this directive into national laws by July 1, 2026.

An Industrial Accelerator Act has been announced, with the proposal is expected on February 25, 2026, and expected to be adopted by the end of 2026. This Regulation aims at accelerating industrial production while contributing to the Union’s climate objective.

This series of initiatives highlights the EU’s continued focus on improving transparency to better protect consumers and markets.

While the reduced scope of the CSRD eases the burden for many SMEs, sustainability remains a priority due to market expectations, supervisory guidance, and information demands from larger companies. Voluntary SME-focused standards, designed to help suppliers respond proportionally, are expected to gain traction as larger companies pass down their data requirements (see Voluntary sustainability reporting standard for SMEs).

Furthermore, as we noted in our article last year, sustainability requirements should not be viewed merely as a compliance exercise but as an opportunity to reshape business strategies for competitive advantage and risk management. For investors, the realities of climate change and political instability remain key risk factors, maintaining strong demand for credible sustainability and transition strategies backed by reliable metrics. Where regulation falls short, it is likely that market forces will step in to address the gap.

Conclusion

Europe’s sustainability journey in 2025 followed two key paths. One path reduced regulatory pressure by narrowing the CSRD’s scope, deferring implementation phases, simplifying the ESRS, and focusing CS3D on the largest companies. The other path strengthened market oversight by regulating labels, ratings, and prospectus disclosures, while rolling out product and building policies in 2026. These paths will converge in practice over the coming year. If companies use regulatory simplifications to prioritize material issues rather than reduce transparency, and if assurance processes and market-level controls work as intended, investors should still receive reliable, comparable data to assess risk and fund the transition. However, questions remain about data consistency, given the absence of sector-specific ESRS and fewer mandated metrics, which could impact comparability across industries. Even so, balancing measures such as assurance, ESMA-supervised ratings, prospectus-level ESG disclosures, and consumer-protection rules will hopefully enhance credibility in sustainability claims.