“It is the pilot who sees far ahead who will not capsize his ship”
Breton proverb
The European Commission has just presented a package of measures, including a draft ”Omnibus” directive amending some regulations on the disclosure of ESG (environmental - including climate change -, social and governance) information and data, also known as ‘sustainable’ information and data. This proposal follows mounting criticism of these regulations from many companies, their professional organisations and right-wing and far-right political parties, particularly during the 2024 European elections, when these parties gained ground. The Draghi Report, which above all calls for a major European investment effort, also mentions that the complexity of the regulations, particularly on sustainable transparency, weighs on the competitiveness of companies. As soon as she was appointed by the Council in July 2024 and confirmed by the European Parliament in September 2024, Ursula von der Leyen committed to greatly simplify the legal framework for sustainable transparency.
In a European economic and political environment that has become more difficult for the sustainable transition, reinforced of course by the headwinds blowing in from America, the desire to lighten the weight of European sustainable regulations is understandable, just as one would lighten the sail of a boat caught in unfavorable conditions. In this case, however, the yacht must be able to keep going and stay on course...
The Commission's proposed reform: reducing the scope and requirements for sustainable publications
The proposed reform of the regulation establishing a ”green” taxonomy and of the Corporate Sustainability Reporting Directive (CSRD) aims to simplify by reducing the scope of application of these two regulations, as well as the publication requirements. It takes the form of a proposal for a so-called Omnibus Directive reforming the CSRD in particular, as well as proposals for amendments to the Commission's delegated acts on taxonomy and sustainable standards, all of which the Commission calls the ”Omnibus package”.
1) The green taxonomy and CSRD before the Omnibus package
Since 2023, the taxonomy has applied to 1,900 large listed financial and non-financial companies. The scope of application was to be gradually extended in line with the CSRD. The Commission, acting on a proposal from a group of experts, drew up a very detailed and complex list of activities considered to be green, sometimes subject to additional conditions. In addition, there is also a general condition, known as ”do no significant harm” (DNSH) according to which, for an activity to be considered green, it must not create significant collateral damage to the environment or climate, such as, for example, an energy efficiency investment that would increase pollution.
Companies must publish the “green” share of their sales, operating expenditure (Opex) and capital investment (Capex). Financial institutions must publish the green asset ratio (GAR) and the green investment ratio (GIR).
In principle, the CSRD will apply from 2025 to large, listed EU companies (with more than 250 employees) for the publication of their 2024 accounts. The scope of CSRD and the taxonomy was to be extended gradually: in 2026 (for the 2025 accounts) for large unlisted companies, and in 2029 at the latest for listed SMEs and foreign companies with a significant turnover (€150 million) in Europe.
The sustainable disclosure requirements are based on the European Sustainability Reporting Standards (ESRS) adopted by the Commission on a proposal from the European Financial Reporting Advisory Group (EFRAG), the body that advises the Commission on this subject. The amount of information to be provided depends on the company”s sector of activity (a company in a carbon-intensive sector must publish much more than a service company, for example) and its impact, whether significant or not, on the environment. The number of information to be published can reach several hundred for industrial companies.
It should be noted, however, that many Member States (starting with Germany) have not transposed the directive into national law and that several governments, including the outgoing German government, have even called for the directive to be scrapped, despite having approved it in 2022.
2) The “Omnibus package” proposes a drastic reduction in the number of large companies subject to these two regulations and simplified voluntary disclosures for companies not subject to them
The Commission is proposing that only companies with more than 1,000 employees should be subject to long-term publication obligations. As a result, not only will the scope of the taxonomy and the CSRD no longer be gradually increased as planned, but a large proportion of the companies subject to the CSRD from 2025 (employing more than 250 employees) and due to publish their accounts soon, would be exempt from doing so if the Commission's proposal is approved. The Commission estimates that this would reduce the number of companies concerned by 80%. The Commission is also proposing to postpone by two years the publication obligations for companies with more than 1,000 employees that have not begun to apply the CSRD.
For companies that no longer fall within the scope of these publication obligations, the Commission proposes voluntary publication on the basis of simplified standards such as those recently proposed by EFRAG for SMEs. These standards would also act as a shield for SMEs, from whom their principals, suppliers or financial partners would not be able to demand more information.
3) The Commission is also proposing a reduction in the amount of information published
For the taxonomy, where the list of information to be published is set by a Commission delegated act, the Commission has published draft amendments that would lead to a 70% reduction in this information. It is also proposing that companies that have made progress in terms of sustainability without fulfilling the conditions of the taxonomy should be able to publish this “partial alignment with the taxonomy”. Finally, it has launched a consultation on a possible simplification of the “do not significant harm” requirement.
For the CSRD, the Commission is committed to revising the delegated act on sustainable standards, reducing the amount of data to be published, clarifying provisions deemed obscure and improving consistency with other legislation.
The reform of the taxonomy confirms the poor cost-benefit ratio of this regulation
1) The difficulties of implementing the green taxonomy
Regulation of the green taxonomy began with a consensual objective: to define activities that are favorable to the climate and the environment in general to facilitate their financing. Unfortunately, several years of work by experts appointed to the Commission and its departments have resulted in a long and complex list of these activities, with additional conditions attached for their classification as green.
The drafting of this reform gave rise to controversy, particularly in the energy sector, and the Commission ended up accepting nuclear and gas as “green”, subject to certain conditions and only for the period of the energy transition...
But it is above all its application that has raised difficulties. In addition to the complexity of the list, it quickly became apparent that the boundary between what is green and what is not, was not sufficiently clear, due to the different conditions to be met for certain activities, and above all the application of the DNSH. For example, many banks only consider loans for the purchase of new buildings that meet the most ambitious standards to be green housing loans; on the other hand, they do not consider loans for energy efficiency improvements (insulation, for example) to be green, out of a concern to avoid controversies linked to the DNSH.
The initial results of applying the taxonomy confirm these difficulties:
- of the companies subject to the taxonomy, between a third and a half have not published their alignment with the taxonomy for the 2023 accounts;
- for those that have published, most have an alignment (ratio) of less than 5% for their turnover (or their portfolio for financial institutions).
2) The draft reform introduces some simplifications, but reduces the scope too much and introduces a voluntary scheme whose fate is uncertain
Given the poor cost-benefit ratio of the taxonomy, the Commission cannot be criticized for seeking to reduce the cost and therefore simplify, by proposing to reduce by 70% the amount of information to be published. It is also seeking to reduce the problems created by the so-called DNSH clause, which deserves to be encouraged.
On the other hand, exempting most large companies from the application of the taxonomy risks depriving the exercise of most of its public interest.
As for the voluntary partial alignment scheme, it deserves to be clarified in a very precise and concrete way so that it does not add to the confusion but actually provides useful information.
The CSRD reform proposal exempts far too many large companies from transparency
It has always been clear that we cannot be as demanding on SMEs as we are on large companies when it comes to publishing sustainable information and data. The creation of simplified standards is a good solution for those SMEs concerned by the environment and climate.[1]
On the other hand, the reduction in the number of large companies proposed by the Commission is particularly shocking in terms of fairness and goes much too far.
This is particularly unfair in terms of equity because:
- it would come at a time when many listed companies with between 250 and 1,000 employees have already made every effort to apply the CSRD (and had already published sustainable information in application of a preceding directive, called NFRD, Non-Financial Reporting Directive);
- it would reward in a totally unfair way the “bad pupils” in this category who have not made these efforts and who are probably often companies in carbon-intensive sectors;
- It would also create distortions between countries that transposed the directive on time and whose companies made the effort (such as France) and those that refused to transpose the directive, even though they had approved it (notably Germany).
Above all, this would result in a significant lack of data available to everyone.
In 2023, according to Eurostat, just over 50,000 companies in the European Union were considered large (with more than 250 employees). They employed 36% of the workforce (58 million people) and generated 51% of the turnover of all businesses. This is therefore a significant basis for sustainable information mapping, especially as many of these companies may have or estimate sustainable data from their customers or suppliers. Reducing the scope of the CSRD by raising the threshold to 1,000 employees will drastically reduce this base, which will represent much less than half of the economy and risks making all the publications clearly inadequate. We will have a map full of holes and “terras incognitas”.
The proposal for a voluntary scheme for “medium/large companies” (between 250 and 1,000 employees) is not likely to fill the gaps. On the one hand, this scheme would have to be more demanding in terms of the information to be published than that for SMEs. Above all, there is a risk of “bad pupils”, i.e. the many companies that simply do not want to publish information that would show their poor environmental and climate situation.
As for the Commission’s commitments to soon propose to reduce the amount of sustainable data to be published and to provide clarifications where necessary, they do not seem to create any major difficulties if the principle of double materiality is maintained, as well as the essential data for the transition, such as the carbon impact of companies and their transition plan. There is many narrative information which could be deleted, but the quantitative information should be preserved as soon as it is important for the company concerned and its environment.
Conclusion: trimming the sails puts staying on course at risk
The European Union’s energy and ecological transition obviously does not depend solely on sustainable corporate transparency - far from it - but it does contribute to it by providing useful information to all the players concerned, enabling them to know where they stand, as well as their customers and competitors. In this way, it encourages, at least at the margin, a reallocation of financial flows in favour of the energy and ecological transition and encourages companies to do so, if only because of the reputational risk.
Some of the reductions and simplifications proposed by the Omnibus package are defensible and may not have a significant negative impact on sustainable transparency:
- simplification of the taxonomy, for which the benefit/cost ratio was low;
- the announced simplification of ESRS standards, provided we focus on the essential quantitative data, including carbon impact and company transition plans;
- a system of simplified standards for SMEs.
On the other hand, in its desire to simplify and in the face of the strong wind that has been raised against a legal framework deemed too complex, costly and restrictive, the Commission is proposing a simplification that comes close to a complete clean sweep. Raising the threshold for companies concerned to 1,000 employees not only removes 80% of the planned companies from the scope of the scheme, as the Commission itself states, but above all certainly more than half of the economic field, including the most sensitive sectors of metallurgy, chemicals, transport and construction.
The European Union risks losing valuable information, creating gaps in its transition mapping, and weakening incentives on the side of the companies which are “the bad pupils” of the transition.
One can wonder that the European Commission proposes such a reduction of the scope of CSRD without waiting for the first implementation which will be known in a few weeks.[2]
It is understood that it is a matter of responding to an emergency more political than technical.
It is hoped that, during the discussion of the proposal of the Commission by the Council and especially by the European Parliament (in principle less influenced by the lobbying of the industry), the real lessons of the first application of CSRD are considered.
[1] JF Pons, « Un enjeu majeur de la transition durable: Il faut aider les PME à collecter et publier leurs principales donnees ESG », Europe Jacques Delors, Novembre 2022.
[2] JF Pons, « Règlementation européenne de la transparence durable (CSRD) : ne pas changer de chevaux au milieu du gué ! », Europe Jacques Delors, Novembre 2024.