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Fears of dramatic EU ‘u-turn’ on sustainability

A group of investors, think-tanks, and policymakers has expressed concern about potential changes to sustainability rules set to be announced by the European Commission tomorrow (26 February). 

The commission is due to announce an ‘omnibus’ package, which is aimed at simplifying reporting requirements for businesses linked to the EU’s sustainability framework. 

The changes would cover the EU Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD). 

Leaks of the proposed changes suggested that the scope of the CSRD could be dramatically reduced, with the threshold for firms rising from 250 to 1,000 employees. 

Shifting political dynamics 

At an online briefing today, Jurei Yada (head of EU sustainable finance at climate think-tank E3G) said that leaks of the proposed changes over the weekend, if confirmed, would represent a ‘u-turn’ on over ten years of work on building the sustainable-finance framework. 

She said that the changes were partly being driven by shifting political dynamics at EU, national, and international level, with right-wing parties leading a “backlash” against green policies. 

“What could have been a technically sound exercise has become politicised,” she stated, adding that voices that had never been in favour of the framework had been “emboldened” to challenge the fundamental elements of the regulations. 

Assessing risks 

Tessa Younger of CCLA, which manages sustainable investments on behalf of non-profit organisations, said that investors relied on sustainability reporting to assess climate-related risks and to hold companies accountable. 

She said that the previous standards provided much greater certainty, though she welcomed the suggestion that ‘double materiality’ would remain in the framework. 

Under this requirement, companies must set out not only how climate change affects them, but also how their operations affect the environment and society. 

Younger expressed concern, however, about what she described as a “significant weakening” of the CSDDD. 

She added that the loss of listed SMEs from the scope of the CSRD would lead to a loss of comparability and consistency. 

‘Uncertainty’ 

Annika Ramsköld (vice-president of corporate sustainability at energy company Vattenfall) told the briefing that, despite suggestions that the changes were aimed at boosting competitiveness, “sustainability is our way of being more competitive”. 

She said that transparency helped companies to build “resilient” value chains and criticised any plans to demand this only of big companies. 

“If we now slow down, it creates uncertainty about where we’re going, and will not help with attracting investment,” Ramsköld added. 

‘Moving away from transparency’ 

Heather Grabbe of the economic think-tank Bruegel described the commission’s focus on the sustainability focus as a way of boosting competitiveness as “odd”. 

She said that the issues that former ECB governor Mario Draghi had highlighted in his report on competitiveness – investment in innovation, access to capital markets, and productivity – were fundamental structural issues that were not affected by sustainability requirements.

Grabbe said that the proposed changes seemed to be going “far beyond simplification” and moving away from transparency. 

“This will not boost the type of investment that Draghi says is needed,” she stated. 

She also pointed out that taking smaller companies out of reporting meant that investors did not have a picture of the whole supply chain. 

Grabbe added that such a change could also remove the EU subsidiaries of very large US companies from the requirements. 

She also expressed concern about a reported change to the CSDDD that would prohibit member states from introducing legislation that went further than the directive – making it a ceiling rather than a floor. 

The briefing heard that any changes would take many months to implement, as the commission’s proposals will then have to go through a negotiation process with the European Parliament and member states.