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As part of its efforts to boost EU competitiveness, the European Commission is poised to publish its first Omnibus regulation - officially kicking off the EU simplification agenda. This initial package will tackle corporate sustainability reporting and accountability - the core of the EU's current sustainable finance framework. Concerning rumors are flying around.
Back in Davos, the Commission President Von der Leyen said: “We will be pragmatic, but we will always stand by our principles. We will protect our interests and uphold our values – because that is the European way”.
The promise has always been “simplification without deregulation”, but lately the soundbite has changed. Reopening agreed legislation, now considered too onerous, is on the table - or even completely scratching basic principles of sustainability reporting to align with international standards.
How does the Commission plan to mobilise trillions of investments to achieve the EU sustainability goals when it is busy dismantling the very basis of the transparency system it put in place to make those investments more appealing?
Just as a house cannot stand without walls and a roof, the sustainable finance agenda depends on transparency requirements to function.
Sustainability reporting: not a cost, but an investment
A well-implemented corporate sustainability reporting is a gateway to finance for companies transitioning to sustainable practices. In fact, without reliable ESG data, financial flows cannot be effectively allocated to support the transition. Citizens are also left in the dark about the impacts of companies and investors on nature, people and the climate. As business’ sustainability risks and impacts are inherently linked, the double materiality principle, cornerstone of EU sustainability reporting, must be upheld.
Is it really so burdensome to be transparent?
The provisions in the CSR Directive itself already provide extensive flexibility, allowing companies to focus only on issues that are truly “material” to them. In fact, following companies' push during negotiations, around 80% of the requirements under the ESRS have been left subject to their materiality assessments. Moreover, phased implementation, taking into account companies’ sizes and value chain reporting limitations, provides further accommodation. In other words, reporting entities still retain significant discretion in defining the scope of their transparency.
What can the EU do to further simplify?
No one wants a legislative framework that is not functional for economic actors and market players. But sound options exist. For example, reducing complexity through sector-specific standards focusing on what’s most relevant to economic sectors, without unnecessary burdens. In addition, the Commission should provide direct guidelines, tools, and implementation support to companies without changing the basis of the adopted legislation.
Arbitrary changes to the Directive in the middle of its implementation would risk creating market confusion and penalising companies that have already made significant investments in compliance.
Securing accountability in global supply chains
As global supply chains remain highly opaque - particularly in critical sectors such as mining and raw material processing - the EU has spent recent years developing due diligence obligations to improve transparency and mitigate risks. Evidently, until some months ago, the EU was still convinced that companies have a key role to play in creating a sustainable and fair economy and society.
But six months after the entry into force of its due diligence Directive, and before it is even transposed and implemented, the Commission might have already changed its mind.
The desire to protect EU companies’ competitiveness and the US push to keep non-EU companies out of EU rules, appears to overshadow the need for sustainable and responsible corporate behavior throughout global supply chains.
Reopening this Pandora's Box now would severely compromise accountability for large businesses, disregarding the adverse human and environmental impacts of their operations worldwide.
On top of this, as stated by a coalition of 25 civil society organisations, businesses and labour organisations in a letter the reopening would also risk delaying, or even weakening, the EU Batteries Regulation due diligence rules which are due to come into force this August. Companies are already preparing and any delays will only hinder the competitiveness of a key European industry.
Simplification without deregulation
Streamlining rules should not equate to weakening or dismantling essential sustainability legislation. The focus should be on smart implementation and harmonisation, rather than deregulation that could jeopardise the achievement of the EU’s climate and sustainability goals.
As the EU refines its regulatory landscape, it must resist pressure to dilute the policies that have positioned Europe as a global leader in sustainability. Simplification should focus on improving implementation, not rolling back hard-won progress.
Strong sustainability regulations are not just an environmental imperative, they are an economic advantage that safeguards Europe’s competitiveness in the transition to a greener future. Investors with assets under management worth trillions, economists, major companies and civil society are raising their voices to support a sound sustainable finance agenda. It is high time for the Commission to listen to these calls. The path forward requires ambition, investment, and unwavering commitment to the principles that define the European Green Deal.
