The European Commission promised regulatory simplification. It wanted, it said, to make life easier for business. Its recent omnibus proposal published on EU sustainable finance reporting and due diligence has, at least in the short term, had the opposite effect.
For the moment, confusion reigns as experts try to understand the details of the plan and how it will land after going through the EU regulatory process. Indeed, it is likely to be the end of the year before a final deal is agreed by the Commission, EU member states and the European Parliament.
The European Green Deal was the beating heart of the last four years of EU policymaking. It was the flagship policy of Commission president Ursula von der Leyen. In its efforts to move the bloc towards net zero emissions by 2050, the EU introduced a swathe of legislation. Too much too fast, warned many, and, as the economic headwinds blew harder, von der Leyen came back for a second term with a message of competitiveness.
Mario Draghi’s 2024 report on competitiveness underscored the urgent need for swift and decisive action to strengthen the EU economy, positioning sustainability as an opportunity. The report acknowledged the potential to streamline finance regulations within its core focus of a more dynamic, competitive, forward-looking European economy.
The result of all this is the omnibus proposal by the commission to “simplify” the EU Corporate Reporting Sustainability Directive, the Corporate Sustainability Due Diligence Directive and its sustainability taxonomy.
While many industry groups have welcomed the commission’s plans, others warn that they go beyond “simplification”. They argue the proposals are an attempt at “deregulation”, an undoing of the rules that reward laggards rather than leading companies working hard to make their business more sustainable.
Some of the main changes that will impact companies are related to the CSRD, which has already come into force for the largest businesses.
The omnibus proposes excluding around 80 per cent of the companies initially covered by the CSRD by making them only applicable to firms with more than 1,000 employees. Likewise, only the same, biggest companies would need to report on how their business aligns with the criteria of the taxonomy. And reporting requirements for companies in the scope of the CSRD that would have been required as of 2026 or 2027 would be postponed by two years, until 2028.
The package also says that any data requested by larger companies from small-and-medium-sized companies to enable them to fulfil reporting requirements should be based on the voluntary reporting standard for SMEs. These were drawn up by the European Financial Reporting Advisory Group to help organisations with fewer resources report on ESG issues in their supply chains.
The changes to the CSRD are particularly worrying for businesses that fall under the scope of the original legislation as, until a new law is enacted, they are still technically supposed to conform to its demands. The situation is made all the more confusing given that not all EU member states have transposed the CSRD into national law.
The commission is trying to get the parliament and EU member states to agree, in the first instance, to a postponement law, that would set down the timeline changes for implementation to offer some clarity for businesses. The rest of the details could then be hammered out in the coming months and perhaps longer.
The commission is of course right to want to improve European companies’ competitiveness, but causing confusion in this way is not helpful, least of all for those companies that have spent money and time getting their house in order as requested.
With fewer companies required to report in the same way, the clarity and comparability of data will be reduced. Without comprehensive sustainability data, businesses, investors, and governments will face greater challenges in identifying and addressing climate-related vulnerabilities – and climate-related opportunities. This will ultimately undermine resilience, innovation, and long-term competitiveness.
It will take months until a final deal is reached by the EU institutions. In the meantime, climate change is not going away. Emissions continue to rise and the costs of extreme events to the economy continue to grow. The EU institutions, national authorities and business organisations must support companies in the actions they need to take for the rest of this year.
