The year 2025 saw a marked retreat in ESG regulation at European level, as in February 2025 the European Commission embarked on a project to amend the standards with a view to boosting the continent’s economic competitiveness. The CSRD Directive, imposing non-financial reporting obligations, and the CS3D Directive, establishing a European duty of care, were at the forefront of this new strategy. The year 2026 marks the culmination of this rollback, notably with Directive 2026/470, published in the Official Journal on 26 February 2026 and due to be transposed in Luxembourg by 19 March 2027. This directive formalises the reduction of the CSRD’s scope to the largest companies. Only those likely to have a more significant impact on people and the environment are subject to non-financial reporting.
A second manifestation of this shift in the European paradigm can be seen in the revision of the European Sustainability Reporting Standards (ESRS). These standards are of particular importance as they establish a common framework for comparing companies’ environmental, social and governance impacts. The European Commission recently announced the publication of draft revisions to these standards with a view to simplifying them. However, this simplification would go hand in hand with a reduction in their scope, as the plan is to align these standards with the ISSB standards, i.e. those adopted at international level. A major consequence of such a move would be to reduce the dual materiality that lies at the heart of European regulation. Indeed, the latter is built around the idea that companies must disclose how sustainability issues affect their business. This information falls under so-called financial materiality, but appears insufficient. The originality of the European texts lies in also requiring disclosure on the consequences of the company’s activities on the outside world. This so-called ‘impact materiality’ is not, for the time being, recognised at international level.
Alignment with international standards is likely to significantly reduce the amount of information the company discloses to its stakeholders.
Despite this clear step backwards at European level, several positive developments are worth noting. EU Directive 2024/825, known as the ‘Empowering Consumers’ Directive, strengthens the fight against greenwashing. This practice involves companies promoting a product by putting forward environmental and social claims that are not true. The regulation aims to penalise such practices, which inevitably mislead consumers. In other words, by combating misleading commercial practices, the aim is to protect consumers and ensure they receive accurate information about a product’s environmental and social impacts. These considerations are also relevant in the financial sector, as the aim is to raise awareness among investors, both institutional and retail, regarding the lack of transparency in certain ESG scoring systems, which could mislead investors into believing a financial product is sustainable when it is not.
In addition to the fact that this directive is currently being transposed in Luxembourg, there are other notable developments worth mentioning at national level. Indeed, the Grand Duchy has always adopted a proactive approach by anticipating European regulations. For example, the CSSF plays a leading role in ensuring that ESG considerations are properly integrated into the existing ecosystem. It is therefore keen to inform and train professionals in recognising misleading environmental claims. Similarly, it has recently revised its supervisory priorities to strengthen the fight against greenwashing.
Luxembourg’s position in the field of sustainable finance is further strengthened by its institutional dynamism. As early as 2016, the Luxembourg Stock Exchange launched the ‘Luxembourg Green Exchange’ (LGX), dedicated to green bond issuances. This platform remains a global benchmark in this field. Furthermore, in the field of microfinance, through flexible legal structures, Luxembourg is seeking to develop blended finance, characterised by funding that combines private and public capital. The same applies to impact investing, which aims to promote investment strategies with a strong social impact. Thanks to its legal flexibility, the Grand Duchy thus hosts a significant proportion of investment vehicles with a social or environmental focus.
In conclusion, Luxembourg has now established itself as a genuine global hub for sustainable finance, despite the overall decline in Europe. However, several challenges remain to be addressed: the harmonisation of regulations and the improvement of the quality of ESG data are prime examples of this.
If you have any questions regarding sustainable finance, ESG issues or regulatory developments in Europe and Luxembourg, our team is on hand to assist you and answer your queries. Please do not hesitate to contact Aurélie Dardenne to discuss your projects and requirements: aurelie.dardenne@brucherlaw.lu