EU Omnibus Proposal: Potential Impacts on the Sustainable Debt Market

On February 26, the European Commission published the first Omnibus simplification package of proposals seeking to simplify sustainable finance rules. In addition to Omnibus I, which focuses largely on sustainability reporting and due diligence (see ISS-Corporate’s coverage), the package includes proposed changes to the EU Taxonomy. The proposed amendments to the Taxonomy Disclosures Delegated Act, the Taxonomy Climate Delegated Act and the Taxonomy Environmental Delegated Act entered a four-week feedback period.  

Debt issuers within and beyond the EU are using the EU Taxonomy to demonstrate the environmental sustainability of their activities and projects to investors. Since 2022, ISS-Corporate has assessed over 50 green and sustainable finance frameworks designed to allocate proceeds to taxonomy-aligned activities. Many more frameworks from our global clients closely – or fully – align their project categories with the EU Taxonomy’s substantial contribution criteria, signaling their ambition. 

While the value of a common definition is widely recognized, the EU Taxonomy has faced criticism for being too narrow and restrictive, with limited international applicability and insufficient consideration of transition assets. On February 5, the Platform on Sustainable Finance published a report acknowledging these shortcomings and proposing avenues to simplify and enhance the  Taxonomy’s effectiveness. On the same day, the International Capital Market Association (ICMA) published a set of recommendations and comments in anticipation of the Omnibus and related regulatory simplifications.  

In this context, this market update note provides preliminary observations on the potential implications of the following changes announced on February 26 for the sustainable debt market:  

• The proposed simplification of the EU Taxonomy’s Technical Screening Criteria (TSC), specifically the “Do Not Significant Harm” (DNSH) criteria.  

• The announced introduction of criteria for “partial” alignment to the EU Taxonomy (based on a future proposal by the Commission).  

The simplification of the TSC, particularly the DNSH criteria, is expected to be well-received by sustainable debt issuers. While per the current proposal only amends Appendix C of the DNSH criteria, the draft delegated regulation published on February 26 underlines the EU Commission’s intention to assess the existing TSC for clarity, international applicability, and ease of demonstrating compliance, among other factors. This approach aligns with ICMA’s recommendations and is expected to enhance the EU Taxonomy’s usability while expanding market participation.  

The initiative to establish criteria for partial alignment is also anticipated to be welcomed by market participants, as it provides a framework for recognizing companies’ progress toward the EU’s sustainability objectives. By allowing the market to consider activities and projects that are not yet fully aligned with the EU Taxonomy, it enables companies to signal their transition efforts to investors. Consequently, new participants can enter the European sustainable debt market and access financing instruments tailored to their transition journey. 

However, the proposed amendments and the announcement of further revisions may lead to a wait-and-see approach, potentially impacting the adoption of the European Green Bond Regulation which entered into force only recently. Issuers of voluntary European Green Bonds (EuGBs) must allocate proceeds strictly to TSC-compliant activities (with a limited 15% deviation permitted under specific conditions). Prospective EuGB issuers may now seek further clarity before committing to issue EuGB designated bonds. Furthermore, it remains unclear whether the European Commission will amend the European Green Bond Regulation to permit partial alignment with the Taxonomy criteria in the allocation of proceeds. Such a change is expected to be favorably received and positively impact the volume of EuGBs issuances.  

With its first simplification package, the EU Commission announced changes to sustainable finance regulation that are still under development. ISS-Corporate will continue to monitor the proposals put forward by the EU Commission, engage in stakeholder dialogue, and assess their potential impact on the sustainable debt market.