As carbon markets heat up, sustainability disclosure reform moves on
Thomas Coutinho Lehnen Senior Account Executive, FleishmanHillard EU
Q2 is here, and carbon markets are moving from political spotlight to political battleground.
The closer Brussels gets to the summer review of the EU Emissions Trading System (ETS), the more visibly the file is moving from technical calibration into high politics. What was already emerging in Q1 has now intensified – the ETS is no longer being debated simply as the backbone of EU carbon pricing, but increasingly as a test case for how far the Union is willing to recalibrate climate policy in the name of industrial competitiveness. The Commission’s review is now pencilled in for 15 July, and the weeks leading up to it are steadily hardening positions across institutions and capitals.
That shift has become more tangible since late March. The European Council’s intervention on the ETS gave political cover to a debate that had already been building beneath the surface, asking the Commission to review the system by July to reduce carbon-price volatility and its impact on electricity prices, while preserving the ETS’ essential role. On the one hand, the Commission has sought to defend the ETS as a market-based cornerstone of decarbonisation. On the other, it has acknowledged that the system now sits at the centre of a broader competitiveness debate, particularly where energy-intensive industry, investment conditions, and electricity costs are concerned.
Since then, the Commission has already moved on one of the most politically sensitive elements of the system. On 1 April, it tabled its targeted proposal to strengthen the Market Stability Reserve, the mechanism that manages the supply of allowances in circulation. Rather than reopening the core design of the reserve, the proposal would remove the automatic invalidation of excess allowances once the reserve exceeds a certain threshold, allowing them instead to remain available as a buffer. In political terms, this was presented as a way to increase the “firepower” of the reserve while preserving the ETS as a functioning market instrument. It was also a signal that the Commission is willing to act early on volatility and market predictability, even before the full July review.
But if the Commission has started to show its hand, Member States are trying just as actively to shape the landing zone. In recent weeks, that pressure has become more organised and more public. France was among the governments opposing the idea of directing a larger share of ETS revenues to the EU budget, arguing these funds should remain available for domestic climate and industrial investment. Spain, by contrast, stresses that the ETS remains a cornerstone of EU climate policy and warns against moves that would significantly weaken it. Germany has broadly defended the ETS as a core climate tool, while pushing for a “future-proofing” of the system through stronger carbon leakage protection and support for industrial frontrunners.
Parliament, too, is beginning to sharpen its lines. Early debates have highlighted familiar divisions: support from the centre-left, liberals, and greens for maintaining the ETS as a central climate instrument; a more cautious centre-right that wants to preserve competitiveness safeguards and avoid blaming the ETS for industrial pressure; and more openly critical conservative and far-right voices that continue to frame the system as part of Europe’s cost problem. That matters because, as with Omnibus, the politics of majority-building may prove almost as important as the substance of the file itself.
The questions now in play go to the heart of what the ETS is meant to do post-2030. Is it primarily a tool for cost-efficient emissions reduction? A source of revenues to finance decarbonisation? A competitiveness buffer for European industry? The Commission appears to be leaning toward a middle path – preserving the ETS as the core architecture, while building in more flexibility, more funding support and a stronger focus on how revenues are used.
Taken together, the picture heading into summer is one of growing political intensity. The ETS is not being dismantled. If anything, recent institutional interventions suggest a strong desire to preserve it. But it is increasingly being reshaped under the weight of industrial and competitiveness pressures. That makes the July review one that is likely to test, once again, how far the EU can adapt its green architecture without fundamentally changing its character.
SFDR negotiations move towards the landing zone
The review of the Sustainable Finance Disclosure Regulation (SFDR) has now entered a more decisive phase. Since the Commission tabled its proposal late last year, negotiations have moved from initial positioning to concrete compromise-building in both institutions. The broad three-category architecture – Transition, ESG Basics, and Sustainable – remains intact as the central organising logic of the file. The debate is therefore not about reopening the framework altogether, but about how strict the criteria, exclusions, disclosures, and safeguards around those categories should be.
Council discussions: a deal on the outstanding issues
In Council, negotiations have advanced significantly. The Cypriot Presidency has now effectively landed a compromise on the outstanding issues under negotiation, keeping Member States broadly aligned around the Commission’s three-category model while resolving several of the more difficult technical questions. The result is a Council position that refines the Commission proposal rather than reshaping it, with a clear focus on making the framework workable for different product types while preserving the credibility of sustainability-related claims.
One of the key landing zones concerns general purpose sovereign debt. The compromise would allow a limited share of EU sovereign exposures to count towards the 70% contribution threshold for Transition products, subject to conditions and documented methodologies showing consistency with the product’s transition-related objective. This is seen as a pragmatic solution to a politically sensitive issue, particularly for products with structurally higher sovereign exposure.
The Presidency has also found a compromise on exclusions for Transition products. Instead of relying solely on sectoral revenue caps inspired by climate benchmark rules, the Council text moves towards a capital expenditure-based approach. Companies in otherwise excluded sectors could qualify where they commit a minimum share of capital expenditure to Taxonomy-aligned activities and follow a measurable emissions-reduction strategy compatible with the Paris Agreement.
On disclosures, the Council has moved towards mandatory product-level principal adverse impact indicators, but with flexibility. The compromise also includes an opt-out for alternative investment funds marketed only to professional investors and clarifies disclosures for non-categorised products and multi-option products. Taken together, the Council line suggests a calibrated approach: more prescriptive than the Commission in places, but still firmly anchored in the simplification logic of the review.
Parliament: compromise negotiations open the political phase
In the European Parliament, the process is now entering its most political stage. The liberal lead MEP (rapporteur) Gerben-Jan Gerbrandy’s draft report had already pushed the Commission proposal in a more demanding direction, particularly on product integrity, disclosures for non-classified products, principal adverse impact indicators, and anti-greenwashing safeguards. With amendments now tabled and the first draft compromise amendments circulating among political groups, the focus has shifted to whether that more restrictive approach can survive negotiations ahead of the ECON committee vote scheduled for 15 July.
The first compromises show that the rapporteur is trying to structure the debate around practical disclosure questions without reopening the core category model. They cover non-categorised products, multi-option products, data and estimates, portfolio management services, and the provision of methodologies by ESG data providers. In particular, the draft compromises maintain the idea that non-classified products should make clear that they do not meet EU standards for sustainable finance products, and they seek to clarify how SFDR categories should be disclosed where investors choose between underlying options, such as in unit-linked insurance products.
At the same time, the amendments tabled by MEPs point to clear political fault lines. S&D and the Greens are pushing towards stricter thresholds, stronger disclosure rules, and tighter safeguards around names, marketing and engagement. Parts of the EPP and groups further to the right are expected to push for more flexibility, particularly around exclusions, product treatment, and the risk that naming and marketing rules become too restrictive.
This matters because the Parliament’s position may ultimately determine whether SFDR remains a relatively technical simplification file or becomes another sustainability dossier shaped by wider political dynamics. The rapporteur’s approach is clearly framed around consumer clarity and greenwashing prevention, but the compromise phase will test how far political groups are willing to support more demanding rules for products that make sustainability claims.
Where the politics leaves policy next quarter
The direction of travel is now clearer. Council has effectively settled its position around a targeted refinement of the Commission proposal, while Parliament is entering the key compromise phase before its July committee vote. If the timetable holds, both institutions should be ready for interinstitutional negotiations (trilogues) in Q3, after the summer break. The file remains less politically charged than Omnibus, but the Parliament’s internal dynamics will still matter. The central question for the next quarter is how far MEPs push on disclosure rigidity, exclusions, and product treatment before trilogues begin.
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