Reopening EU Sustainability Rules Poses Multiple Risks
Potential dilution of directives could prove detrimental to disclosures from companies as well as information flows to investors.
The proposed introduction of an ‘omnibus’ consolidating three key pieces of European sustainable finance legislation is likely to cause significant uncertainty and cost for both investors and businesses, experts have warned.
The move has been mooted amid an increased focus on the efficiency of European regulation, but there are concerns rules could be watered down, potentially reducing transparency and scrutiny of firms’ sustainability performance.
Earlier this month, European Commission President Ursula von der Leyen floated the idea of combined legislation to reduce sustainability reporting burdens facing corporates, specifically naming the EU taxonomy for sustainable activities, the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD).
“It’s our task to reduce this bureaucratic burden without changing the correct content of the law,” she told reporters.
An omnibus simultaneously modifies several pieces of EU legislation and does not necessarily mean that the EU Taxonomy, CSRD and CSDDD will be merged. It would likely require one text to amend the two respective directives and a further text to amend the Taxonomy regulation.
Since von der Leyen’s comments, no further clarifications have been made, leading to speculation over the practical implications. In particular, the prospect of reopening agreed rules within the Taxonomy and two directives has been met with dismay.
“Reopening the files and moving the goalposts risks significant extra cost to business, rather than lifting any burden on them. That’s something that the Commission has completely failed to take account of,” Richard Howitt, an independent advisor who spent more than 20 years as a Member of European Parliament, told ESG Investor.
“Business associations don’t necessarily agree with the view of reporting being a burden. Talking to individual businesses and investors, they say it’s going to cost them millions if th[e EU] reopen this.”
But businesses have voiced concerns about their ability to comply with CSRD when it comes into effect next year. A report released this week by PwC Luxembourg surveying more than 200 C-Suite executives found that 55% of companies expect challenges in maintaining data quality and consistency required for CSRD reporting, while 45% expressed concerns on having “sufficient resources” to meet the directive’s requirements.
It was reported in April that finance and business ministers from France, Germany, and Italy were setting plans for a wide-reaching omnibus law to cut reporting requirements.
A report published by former European Central Bank President Mario Draghi in September pointed to the Taxonomy, CSDDD, CSRD, as harmful to EU competitiveness, with the latter branded a “major source of regulatory burden”.
“The Draghi report says too many different reporting frameworks are burdensome to companies. But that’s the whole reason why CSRD was brought in,” said Howitt. “The report shows a fundamental misunderstanding of why that proposal was brought forward.”
Europe’s sluggish economic growth has made competitiveness an increasing priority, while recent pan-European elections saw right-wing parties prosper at the expense of centrists and Greens.
As such it is unclear whether the omnibus is an attempt to streamline compliance for businesses or change the fundamental aspects of the laws. “There aren’t that many overlaps in truth,” added Howitt, who also spent almost three years as CEO of the International Integrated Reporting Council.
Howitt highlighted that the process of renegotiating a framework could take as long as four or five years, slowing progress for both businesses and investors when it needs to accelerate, and that changes to legislation would likely weaken their sustainable finance objectives given the “politics of the moment”.
Diluted directives
The Taxonomy, CSRD, and CSDDD have already been adopted by the EU, with the directives experiencing prolonged approval processes. The Taxonomy was given the green light in 2020, offering investors and companies a classification system for which activities are considered ‘green’ or ‘climate friendly’.
In 2023, the CSRD was approved, introducing requirements for businesses to report greenhouse gas emissions and other disclosure requirements. After much wrangling, the CSDDD was adopted in April, enhancing requirements and obligations for companies in relation to the environmental and social harms of their operations and supply chains.
Both the CSRD and CSDDD have already been watered down, dampening their usefulness for investors.
In February, sector-specific disclosure rules were pushed back by two years to 30 June 2026 by the European Parliament and Council to give companies more time to prepare for the first set of European Sustainability Reporting Standards. In its 2024 work programme, the commission cut CSRD reporting requirements by 25% to ease the regulatory burden for corporates.
Under the final CSDDD text approved by the parliament, far fewer companies are subject to the rules than originally intended, and the directive’s roll-out will not be fully implemented for five years.
The potential omnibus arrives just ahead of nearly 50,000 large companies across EU member states being required to disclose data from January on the social and environmental impact of their business operations under CSRD.
“Companies that already started to implement the rules are at risk,” said Pierre Garrault, Senior Policy Adviser at pan-European sustainable investment organisation Eurosif. “Reopening these rules would create regulatory uncertainty for companies across the EU, which would be hugely detrimental for them.”
He added that a potential fundamental change in the core rules of CSRD reporting and CSDDD during implementation could “jeopardise the capacity of investors to get sustainability data needed for them to invest in sustainable activities”.
“It would also hinder the development of the EU’s strategic objectives including decarbonising the economy and scaling up sustainable finance,” said Garrault.
“As a representative of investors, we were expecting the CSRD in particular to deliver sustainability data necessary to take informed investment decision. Depending on whether and how it would be modified, investors may not have the necessary information to do so.”
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