‘Simplicationʼ of EU sustainability rules prompts questions

“Simplification promised, simplification delivered” is how European Commission president Ursula von der Leyen hailed the EUʼs ‘omnibusʼ legislation on sustainability rules yesterday. But financial firms still have questions.

The commission said that its proposals, if adopted, would save corporates around 6.3 billion euros by “reducing administrative burdens” and take 80% of all EU companies out of reach of its Corporate Sustainability Reporting Directive (CSRD). It has also pushed back the start date for larger companies currently scheduled to begin their sustainability reporting in 2026, to 2028.

The number caught by the Taxonomy Regulation is also being scaled back to align with the scope of the Corporate Sustainability Due Diligence Directive (CSDDD). The taxonomy’s reporting templates are also being cut back by 70%.

There will also be adjustments to add an optional “partially aligned” reporting category to the taxonomy and a promised simplification of the Do No Significant Harm (DNSH) criteria.

Beyond promised reduction

Nicolas Lockhart, a partner specialising in ESG and trade at law firm Sidley Austin, said the proposals “go way beyond” the 25% reduction in the sustainability reporting burden first promised by von der Leyen last October.

“The 20% of companies still reporting will face fewer reporting requirements under revised reporting standards that are still to come, and the vast majority of reporting companies will also be entirely relieved of taxonomy reporting.  So this is a massive reduction in sustainability reporting burdens,” Lockhart said today.

Meanwhile, EU officials are adamant that the rollback in scope and content of the bloc’s sustainability rules does not mean it has abandoned its green efforts.

Maria Luís Albuquerque, commissioner for financial services and the Savings and Investments Union, said “reducing excessive administrative burden” would enable the commission to deliver on its Green Deal objectives. And Michael McGrath, commissioner for democracy, justice, the rule of law and consumer protection, said the objective of the CSDDD to “prevent companies from indirectly contributing to exploitative business practices, harming human rights, the climate, or the environment through their value chains” had been maintained in its simplified compliance framework.

Lockhart said the revised CSDDD took a much more “nuanced approach to supply chain due diligence”.

“Basically, [firms] won’t have to look proactively for problems with indirect suppliers but, at the same time, they won’t be able to turn a blind eye when they should know about problems, say through the media or complaints.  This will make supply chain due diligence less costly and risky, and more in line with the real-world challenges that even the biggest companies face in policing indirect suppliers,” he added.  

Details

Michael Littenberg, global head of ESG, CSR & business and human rights compliance practice at law firm Ropes & Gray, said the proposals published by the commission do not “fully answer the important question of what disclosures will be required”.

Details on revisions to the European Sustainability Reporting Standards (ESRS) will be consulted on in due course. Yesterday, the commission said the aim of the revisions would be to reduce the number of data points and clarify areas that had caused confusion about the precise information to be reported.

Speaking at the European Securities and Markets Authority (ESMA) capital markets conference earlier this month, Belgian Financial Services and Markets Authority (FSMA) chair Jean-Paul Servais said he believed the scope of EU reporting requirements should be reduced, and suggested focusing on “climate first”.

Servais, who is also vice chair of the International Organization of Securities Commissions (IOSCO), has been instrumental in driving the take-up of the International Sustainability Standards Board (ISSB) sustainability reporting standards. The ISSB standards, which are not as extensive in their reporting requirements as the ESRS, have been, or are in train to be, adopted by countries responsible for 55% of global GDP.

Lacking information

Finance Watch, a non-governmental organisation that advocates for finance being a force for good in society, was “alarmed” by the proposals, which it said would leave financial firms without the information they needed to aid the green transition.

“The omnibus scales back corporate sustainability reporting, weakens due diligence obligations and limits the potential for financial markets to drive the green transition. It undermines Europe’s competitive edge, stripping away regulatory innovation and sustainable prosperity, while failing to provide the clarity that industry needs. If this is what simplification looks like, then who is it actually for?” the group said in a statement on February 26.

The European Banking Federation (EBF), an industry lobby group, said it welcomed and supported the commitment to reduce the number of data points that firms would have to report, but it was that there had to be alignment between the information required of corporate and what its members are required to report.

“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,” the EBF said in a statement today.

The issue stems from the proposal to impose what the commission dubbed a “value chain cap” that would “shield” small and medium-sized enterprises (SMEs) by restricting what information large companies, including banks, can request from them. Financial firms will only be able to ask for ESG data as set out in the voluntary reporting standard for SMEs (VSME) published by the European Financial Reporting Advisory Group (EFRAG) in December.

Denisa Avermaete, senior sustainable finance advisor at the EBF, said it was still analysing the extent of the data gap, and that much would depend on the final versions of both the CSRD and the VSME, as well as “whether and when” the commission reviews financial sector regulation (including ESG risks in Pillar 3 of the Capital Requirements Regulation and the Sustainable Financial Disclosure Regulation) for consistency with the omnibus.

Treat as priority

Yesterday the commission urged co-legislators to treat this omnibus package as a priority. EU rules are approved by a tripartite arrangement, which means both the European Council and the European Parliament can make changes to the commission’s proposals, in what is often a lengthy legislative.

“We are advising clients not to count their chickens before they hatch. A lot can still change between now and the adoption of final directives,” said Littenberg at Ropes & Gray.