European Business at Risk from Omnibus
Despite concerns, Richard Howitt, one of the architects of the EU’s non-financial disclosure rules, sees opportunities as the package moves into co-decision.
From whichever angle one views things, attempts by the European Commission (EC) to streamline its sustainable finance disclosure rules look like bad news for investors.
The proposal significantly reduces the scope of companies caught by the Corporate Sustainability Reporting Directive (CSRD), compelling only the very largest to make ESG disclosures. The reforms have also significantly scaled back the long-awaited Corporate Sustainability Due Diligence Directive (CSDDD).
However, Richard Howitt, a strategic advisor on corporate responsibility, says pessimism will not help anyone, insisting that the competitiveness arguments in favour of sustainability can forge consensus.
“Doom and gloom leads us nowhere,” said Howitt. “It’s very, very easy to criticise and threaten everyone with the worst consequences of catastrophic climate change, but I’m much more interested in doing something to stop that happening. I would like to see people act to make a difference, and I think doom and gloom disempowers them from doing that.”
Howitt spent 22 years as a Member of the European Parliament before becoming chief executive officer of the International Integrated Reporting Council, which has since been rolled into the International Sustainability Standards Board.
He was also one of the core architects of the Non-financial Reporting Directive (NFRD) , which was adopted in 2014 and helped pave the way for the expanded scope of the CSRD. Howitt is proud of the work that went into the NFRD because it furnished sustainability-focused investors with new information that they badly needed.
“One of the arguments behind the omnibus simplification is that the different regulations aren’t coherent and don’t match each other,” said Howitt. “So if this was genuinely a tidying-up exercise, this would be perfectly valid, but in practice the process has become so much more than this.”
For Howitt and others within the sustainable finance community, the question is whether there is still a viable path towards greater corporate transparency. And if so, what might such a path look like?
A silver thread
Despite his positivity, Howitt warns Europe could be heading for a lost decade, with the EC having spent five years building something up that it is now tearing down again.
“But at the end of this decade progress will resume, because the fundamental arguments behind all of this are only going to intensify,” said Howitt. “What we need to think about now is whether there is a political route – political with a small ‘p’ – that means things are not totally taken apart.”
The EC’s decision to completely open up the sustainable finance omnibus package, handing it over to the European Parliament and Council for negotiation, has made salvaging core components of the existing directives harder.
“The European Parliament now has a right-wing majority, and in the Council right-wing elements are in the ascendency. Any political analysis therefore suggests that the omnibus simplification could end up being even more watered down than the proposal that the EC has come forwards with,” said Howitt.
Forging a positive way forward for the package means limiting the influence on legislative discussions of certain extreme right-wing groups in Europe, he said. He believes this is something that EC President Ursula von der Leyen wants to do. According to the Centre for European Policy Studies, a think tank, nearly a quarter of MEPs (24%) are more right-wing than the centre-right European People’s Party (EPP).
“The EC doesn’t want far-right votes to take this through,” he said. “The mood music may not be great at the moment, but if a centrist majority can be found in the European Parliament then it may be possible to reach a compromise. This kind of thing has happened in the past. I hope that it will also happen with this generation of politicians.”
The same could happen at ministerial level through Council discussions. While Germany and France have both been pushing for a reduction on sustainability disclosures, in line with the omnibus simplification, some smaller member states have spoken out against the reforms.
In February, Spain sent a letter to the EC, warning the executive not to de-rail Europe’s green agenda. Denmark has previously warned against watering down the legislation, too, although recently appears to be wavering. Denmark’s position could be important, since the country takes over the rolling six-month EU Presidency in July.
“There’s a lot of politics still to play out,” said Howitt.
The European Parliament is currently looking for a rapporteur that will take the omnibus proposal through plenary. Howitt says that a decision on this should be reached within the coming weeks.
Geopolitical risk
Where the EU ends up on its first omnibus package is crucial for the bloc’s competitiveness. While the EC and certain member states maintain that easing the reporting burden of SMEs will boost Europe’s productivity, others see things the other way, arguing that a lack of ESG-related data will actually harm the EU’s global standing in the world. The risk is heightened the omnibus transmits uncertainty on the pace of Europe’s net zero journey.
“The big competitive challenge for Europe is how well and how quickly it follows the energy and environmental transition in competition with China and the US,” said Howitt. “All evidence suggests that China and the US, even under [President Donald] Trump, are engaging in that competition. For Europe to take a step back is a fundamental misunderstanding of the competitive threat that exists in the world today.”
Pressed about the new Trump administration, Howitt doesn’t think it will have a particularly significant impact on where the US, and the global climate agenda, ultimately ends up. Howitt highlighted two examples from Trump’s first term that suggest the US president’s “pragmatic” streak. Howitt argues that import tariffs Trump imposed in his first term on solar panels were principally protectionist. Trump also introduced new human rights legislation in the form of the Forced Labour Act, which Howitt says was little more than a snipe at China.
“Trump is pragmatic about sustainability arguments if they suit his own objective, and I predict that this will be the case over the next four years,” said Howitt.
Howitt pointed out that, during Trump’s first term, there was a co-ordinated effort among a number of American companies to align with the Paris Agreement, despite the US formally withdrawing from it. Howitt expects to see something similar this time around.
“Companies are going to be a bit less vocal about this, at least for the first couple of years under Trump 2.0, but I expect them to continue with business as usual,” said Howitt. “For an investor perspective, all the arguments about risk management remain completely unchanged. There’s no reason whatsoever why they should be pushing less for sustainability information from corporates and campaigning less for climate transition.”
This is why any significant rollback on corporate disclosure from the EU would be a competitive miscalculation, warned Howitt.
COP 30’s litmus test
Howitt expects that the real test of US corporate commitment to the sustainability will come in November, when the United Nations Climate Change Conference (COP 30) convenes in Belém, Brazil in November.
“[US companies] are keeping their heads low at the moment, but this will have passed by the end of the year. COP 30 will be a litmus test of where US business stands,” said Howitt.
But here, too, the sustainability expert sees dangers, with the COP process starting to look a bit tired and worn. While there was some limited progress in Baku last year on climate finance, this has not offset a broad-based sense of diminishing returns from the process.
“It feels a bit as though the whole process is running out of steam. As each year goes by, it becomes harder for negotiators to muster the same level of enthusiasm and initiative.” said Howitt.
The danger is that multilateral institutions start to fracture – something that Howitt insists must be avoided at all costs.
“There may be different diplomatic routes that can be explored, and new ways of leveraging off pressures in the capital market,” said Howitt. “Net zero has really galvanised business opinion, more than any of the other sustainability arguments, and I anticipate that this is going to continue. Technical innovation and developments will provide the stepping stones.
“If policymakers can deliver on the concept of a just transition and make the sustainability journey affordable, then we could be looking at a positive future in the years ahead,” he added.
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