Tracking the reshape of sustainability governance
Anna Davreux Managing Director, FleishmanHillard EU
Thomas Coutinho Lehnen Senior Account Executive, FleishmanHillard EU
The year has begun and Omnibus I is behind us – and now carbon markets are stepping into the political spotlight.
Exactly a year after the initial proposal, the Omnibus package has been politically settled and is set to enter into force. What only months ago dominated headlines and parliamentary dynamics has now moved into implementation mode. Yet almost immediately, another sustainability workstream – long considered highly technical and largely insulated from high politics – is rising to the top of the European agenda: the EU Emissions Trading System (ETS).
For over twenty years, the ETS has functioned as a key element of the EU’s climate architecture, calibrated through complex parameters, cap trajectories, and stability mechanisms. But ahead of its review scheduled for this summer, the debate has shifted decisively. What was once primarily about technical fine-tuning has become a central question of European industrial strategy. The ETS is no longer being discussed only in terms of carbon abatement efficiency, but as a core component of the EU’s competitiveness model.
This evolution became more visible in the run-up to the March European Council summit. Following the February leaders’ retreat in Alden Biesen, where ETS reform featured prominently, pressure from capitals became more organised. Different letters circulated ahead of the summit pointed in different directions but all served the same purpose – to shape the Commission’s landing zone before the summer review. Some governments pushed back against the idea of diverting a larger share of ETS revenues to the EU budget, and others stressed that the ETS should remain the cornerstone of EU climate policy and warned against weakening it in ways that could undermine investment certainty.
At the heart of the debate lies a fundamental question that remains unresolved: what is the ETS supposed to be for in the 2030-2040 period? Historically, it was designed as a cost-efficient emissions reduction instrument. Over time, it has also become a revenue generator, a driver of innovation funding and, through CBAM, a geopolitical instrument projecting EU standards abroad. Now, it is increasingly framed as a competitiveness buffer – a tool that must not undermine the EU’s industrial base during a turbulent global transition. As policymakers weigh these different dimensions, the challenge will be to clarify how they interact and what balance should be struck between them in the next phase of the system’s evolution.
The Commission has still not put forward its full review proposal, but the latest political signals are more concrete than they were only weeks ago. Climate Commissioner Hoekstra had already indicated that changes to the Market Stability Reserve – the mechanism used to manage allowance supply and address price volatility – would come ahead of the broader ETS review, together with updated benchmarks for free allocation of allowances. After the European Council summit, Commission President von der Leyen went further, announcing that proposals on both points would come very soon, alongside work on a new ETS-based investment booster worth around €30 billion to support industrial decarbonisation. In parallel, leaders formally invited the Commission to present the broader ETS review by July 2026 at the latest, with the stated aim of reducing carbon-price volatility and mitigating its impact on electricity prices while preserving the essential role of the system.
The summit outcome suggests that, politically, the debate is now less about whether the ETS should remain in place than about how far and how quickly its functioning should be adjusted. President von der Leyen described the discussion as broadly positive for the ETS, and the final conclusions stopped short of calling for fundamental redesign. At the same time, the combination of immediate tweaks and a new investment support instrument shows that the pressure coming from industry and Member States has translated into early action. The emerging debate is therefore not a binary one between preservation and dismantling, but a more difficult argument over recalibration – how to contain volatility and competitiveness risks without weakening the investment signal that underpins the system.
This is also the first time the EU must confront the ETS in a post-2030 world shaped by diverging global approaches to carbon pricing. While the EU maintains a cap-and-trade model, other jurisdictions rely on subsidies, fragmented carbon markets, or no pricing at all. In this context, the summer review becomes a strategic stress test: can the ETS remain both an effective climate instrument and a pillar of a “Made in Europe” industrial agenda?
The political sensitivity is heightened by parallel developments. As of 1 January 2026, the Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase, requiring authorised declarants to purchase and surrender CBAM certificates linked to ETS prices. The Commission has also recently launched a CBAM package, including a proposed extension to certain downstream products and the creation of a temporary decarbonisation fund financed by CBAM revenues. This reinforces the structural link between CBAM and ETS – any reconsideration of the timeline for phasing out free allowances immediately raises questions about CBAM’s readiness to assume the anti-leakage function at scale.
What makes this reform particularly challenging is its political implications. Price corridors, additional flexibilities, revised cap trajectories, or adjustments to revenue use can all be engineered. The debate has only just begun, but it is already heating up and the path to summer is unlikely to be smooth.
SFDR enters the negotiation phase
Three months after the Commission unveiled its proposal to review the Sustainable Finance Disclosure Regulation (SFDR), the file has formally entered the negotiation stage in both the Council and the European Parliament. The proposal’s core ambition – to replace the Article 8/9 framework with three clearer product categories (Transition, ESG Basics, Sustainable) – is now being tested against Member State sensitivities and parliamentary dynamics. While the review is less politically charged than Omnibus I, it remains highly consequential: it touches on product labelling, marketing practices, data use and disclosure architecture across the EU financial system. The coming months will therefore determine not only the technical shape of the new categorisation regime, but also whether simplification can be delivered without reopening deeper political fault lines around sustainable finance.
Council discussions: early momentum under the Cypriot Presidency
In the Council, discussions are progressing at a relatively steady pace. The Cypriot Presidency has signalled an ambition to reach a common position by the end of summer, and recent Council discussions suggest that Member States are now engaging substantively with the architecture proposed by the Commission.
Current exchanges are centred on the design of the three product categories, where there appears to be broad support for the 70% minimum contribution threshold introduced by the Commission, although some Member States have floated the possibility of a higher threshold. Member States have also raised concerns regarding the strictness of exclusion criteria under the categories, particularly for the transition one, arguing that this could pose an obstacle to transition finance. Questions have also arisen around how open the list of eligible methodologies and standards should be under each category, and whether certain concepts – such as the credibility of transition strategies – require clearer drafting. Another key discussion point concerns the use of data and estimates. Member States appear divided between those seeking more flexibility in how financial market participants can rely on estimates, and those calling for stronger safeguards and documentation requirements. The Presidency has framed this debate carefully, mindful of the broader simplification objective that underpins the review.
On disclosures, there is growing support for reducing entity-level requirements, including the deletion of certain principal adverse impact and remuneration disclosures. Implementation timelines are also under scrutiny, with discussions ongoing about whether to extend the application deadline beyond the Commission’s proposed 18 months and whether transitional arrangements should be adjusted for existing products.
Overall, while positions are still forming, the tone in Council suggests a pragmatic effort to refine rather than fundamentally reshape the Commission’s proposal.
Parliament: team appointed, political positioning to follow
In the European Parliament, the process is at an earlier stage. The ECON committee has formally appointed its negotiating team, with liberal MEP from the Renew Group, Gerben-Jan Gerbrandy, serving as the lead negotiator (rapporteur). Gerbrandy brings prior experience in sustainable finance legislation, having previously been involved in negotiations on SFDR I and on the Taxonomy Regulation. The appointment of an experienced negotiator suggests an intention to handle the review with technical depth and political awareness.
At this stage, however, substantive parliamentary debate has yet to begin. No formal exchange of views has yet taken place in committee, and a first draft report has not yet been tabled. While there is an ambition to move broadly in parallel with the Council – potentially finalising a position before the summer – the timeline remains indicative rather than fixed.
The absence of early political skirmishes does not necessarily imply smooth sailing ahead. The file touches on issues that have previously generated division in Parliament, including taxonomy alignment, transition finance credibility, and the balance between simplification and investor protection. For now, the parliamentary process is in its preparatory phase, with positioning likely to crystallise once the rapporteur presents his draft.
Where the politics leaves policy next quarter
As negotiations gather pace, the SFDR review appears less polarised than other more recent sustainability files, yet it remains politically sensitive. The Council is advancing technical discussions under a clear timetable, while Parliament is still organising its internal dynamics. The key question for the next quarter will be whether the cross-party patterns observed during Omnibus negotiations re-emerge here, or whether SFDR – framed as a targeted simplification – allows for a more traditional centrist coalition to take shape.
Tracking the reshape: where do we stand?
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