EU faces challenges in streamlining sustainability regulations

The European Commission’s proposed Omnibus Simplification Package – which puts a torch to the bundles of EU sustainability requirements companies have been anticipating for years – has received a mixed reception from business, investors and policy makers, many of whom are nervous that the planned bonfire of green regulations may see sparks fly.

The Omnibus package is positioned as a response to long-standing concerns from businesses about regulatory complexity andcompliance costs. The Draghi Report on European Competitiveness identifiedfragmented sustainability reporting requirements as a barrier to investment and economic growth, and the European Commission’s Competitiveness Compass called for an “unprecedented simplification effort” to unlock capital and innovation, and committed toreducing reporting burdens by at least 25% for all companies and 35% for SMEs.

Under the new approach, there are substantial changes to the Corporate Sustainability Reporting Directive (CSRD), with the number of companies in scope cut by approximately 80%, as only those with more than 1,000 employees (and either €50 million turnover or €25 million balance sheet) will be required to report.

The remaining 20% will face a reduced reporting burden with 70% fewer data points in the European Sustainability Reporting Standards (ESRS), which will be realigned to focus will be on quantitative data points rather than narrative data points.

In addition, reporting for mid-sized and smaller companies becomes voluntary and reportingrequirements for companies that have not yet started implementing CSRD will be postponed by two years.

The scope of the CSRD is also reduced, with significant changes to due diligence requirements. Business will need to show evidence of risk assessments for Tier 1 suppliers only, rather than for their entire supply chain, unless they have reasons for concerns, while the proposals suggest extending periodic assessment intervals from one to five years, and any penalties will no longer be directly linked to a company’s net turnover.

Additionally, the EU has moved away from imposing an EU-wide civil liability framework, reducing litigation risks for businesses, and the application of the directive is set to be delayed until 2028 for large companies.

Business benefits

At first glance, all this looks like welcome relief for businesses, who should face less red tape, with EU estimates suggesting cost savings of around €6.3bn, plus over €50 billion mobilised for investment, but the devil is in the detail. Catherine Duggan, Head of Sustainability in Advisory Consulting at Grant Thornton, reported a mixed response to the proposals from clients.

“Some had already invested significantly (e.g. resources, training and management time), preparing for FY2025 disclosures and are now questioning the value of the effort deployed to comply with a directive that may no longer apply to them. Others who saw the CSRD as onerous and regulatory overreach are likely to feel vindicated,” she said.

Duggan cautioned that “while the headline proposals seem clear cut, they will provoke uncertainty”, pointing out that the final agreement, together with the timeline of implementation, is subject to the European Parliament and Council consideration and adoption.

As a result, companies who are mid-way through the process will need to pause and reassess their next steps, considering these announcements, while those who were planning to begin the process, may need to re-evaluate their position.

In both cases, this lack of clarity is likely to result in some additional costs and potential delay some decisions. The two-year delay for companies that have not yet reported adds a layer of uncertainty, as firms may need to adjust compliance strategies mid-transition.

It is also not clear how national governments will interpret and implement these changes, meaning some multinationals could face differing requirements across regions.

Nor should businesses see themselves as off the hook for sustainability issues further down their supply chain than their tier 1 direct suppliers. Sharon Smith, head of learning and knowledge (climate and sustainability) at law firm Pinsent Masons, cautions:

“Although it is early days, it is possible NGOs and activists may step up legal campaigns in the event companies are noticeably backtracking on sustainability commitments. Additionally, companies should also be aware of their stakeholders’ expectations as investors may require data for their own disclosures and customers may be influenced more by pressure groups if companies lose control of their strategic messaging by cutting back on reporting.”

Investor interests

Duggan points out that stakeholders, particularly in the financial sector, who were relying on CSRD disclosures to make informed decisions may again be tasked with reviewing disparate, unverified information in the absence of sustainability statements, which may impact processes.

Her views are echoed by Andreas Rasche, professor and associate dean at Copenhagen Business School, who commented:

“The proposal implies that investors can only expect structured and comparable ESG data from the very big companies, as both CSRD and the Taxonomy have been limited severely in terms of their scope. This will make benchmarking and more fine-grained analyses across a large set of companies almost impossible.”

Eurosif – the European Sustainable Investment Forum – lists a number of concerns around the proposed amendments, which it says risk weakening EU sustainability disclosures and undermining legal certainty for both investors and corporates. The body also says the plan will detrimentally impact the ability of investors to allocate capital for industrial decarbonisation, to conduct forward-looking risk assessments and to support the transition to sustainable growth, and claims they go against the goals the EU Commission outlines in their Clean Industrial Deal and investment simplification omnibus.

Nathalie Dogniez, Eurosif Chair, commented: “The Commission’s proposal to reopen the CSRD for renegotiation creates legal uncertainty for investors and businesses and harms the first movers who have already prepared their first sustainability reports or started working towards compliance. The ability of out-of-scope companies to raise finance is likely to be hindered.”

Policymaker perspective

In contrast, the European Banking Federation (EBF) said it “very much welcomes the Omnibus package”, identifying streamlining and simplifying the EU sustainability regulatory framework as “important to boost the competitiveness of European companies”.

The EBF would like the EU to take further action to ensure consistency for business and investors. In a policy briefing, EBF said: “For example, Pillar 3, which requires banks to disclose information related to ESG risks, must be aligned with the final text of the CSRD and the Taxonomy Regulation.

“Data availability must be fully reflected throughout the entire EU regulatory framework. We, therefore, call for the EU Commission to open the review of financial sector sustainability regulation as soon as possible.”

But not all commentators are as positive. Researchers at LSE’s Centre for Economic Transition Expertise concluded the proposals mean it will become more challenging for business and investors to assess climate and environmental risk, as accurate, economy-wide data will become more difficult to obtain, stating: “The EU Omnibus Simplification Package as currently proposed risks weakening corporate accountability, increasing uncertainty and penalising the early adopters in the sustainability transition.”

They caution the proposals “will lead to fragmentation between different reporting standards and overreliance on estimations and proxies. While the Omnibus package proposes to exclude smaller companies from direct requirements, they remain integral to supply chains and will still face reporting demands from larger firms needing this data for compliance, internal decision-making and risk management. Lack of high-quality data – another likely result of the proposals – could penalise SMEs in terms of their access to capital, as financial institutions increasingly incorporate material sustainability factors into risk analysis.”

With so many competing views on how – and when – the package will take effect, all eyes are now on the EU to see how successful it proves at reducing regulatory burdens while maintaining compliance with key sustainability goals.