It was in May 2018 that the European Commission launched its highly ambitious European Sustainable Finance package. Seven years later, the political winds in Europe have shifted significantly, and sustainability ambitions are being scaled back step by step.
We see this in the developments around the CSRD and CSDDD, but also in the leaked text related to SFDR 2.0. And more is coming.
Omnibus package from the European Commission
The ink of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainable Due Diligence Directive (CSDDD) had barely dried when, on February 26 of this year, the European Commission published its so-called Omnibus I package. In it, the Commission proposed amendments primarily to the current CSRD and CSDDD.
Under the CSRD, certain companies and institutions are required to prepare sustainability reports, while under the CSDDD, certain companies were assigned due-diligence obligations or specific duties of care regarding human rights and the environment. The goal was to simplify and ease sustainability-related obligations for European companies and institutions. This was meant to make the European economy more competitive, which is also reflected in the Draghi report.
European Parliament’s position on Omnibus I
Where the European Commission aims to limit the scope of companies covered by the CSRD to those with more than 1.000 employees and a balance sheet total of more than 25 million euro or revenue of more than 50 million euro, the European Parliament goes much further. In its position adopted on November 13, the Parliament argues for excluding even more companies from the reporting obligation. It proposes raising the threshold to more than 1.750 employees and net revenue of more than 450 million euro.
The European Parliament also wants to raise the threshold for the CSDDD. If it were up to the Parliament, this threshold would apply only to companies with more than 5.000 employees and net revenue of more than 1,5 billion euro, instead of more than 1.000 employees and net revenue of more than 450 million euro, as proposed by the European Commission.
The Parliament’s rapporteur, Jörgen Warborn, calls this a simplification of rules: “Today’s vote shows that Europe can be both sustainable and competitive. We are simplifying rules, cutting costs, and giving businesses the clarity they need to grow, invest, and create well-paying jobs.”
This is a rather simplistic representation. The Parliament’s proposals shift the transition to a sustainable society to an even smaller group of companies. The assumption that only these companies can do the work for the rest of Europe, while climate targets remain almost unchanged, is of course incorrect and borders on greenwashing by the European co-legislator.
Impact on the financial sector and SFDR 2.0
The financial sector has long emphasized the need for sustainability data from many companies, including for its own reporting obligations under the SFDR. If fewer companies fall under CSRD reporting, the EU Taxonomy, or CSDDD due diligence, this directly affects the information obligations of the financial sector. Apparently, the European Parliament has taken this into account by adding an amendment stating that legislation for the financial sector must be aligned with the CSRD provisions. In other words, the financial sector should not be forced to obtain information from companies that are not required to report under the CSRD. This is a positive development. The financial sector has consistently argued that its information obligations must align with corporate sustainability reporting.
Where descoping is the rule in the CSRD and CSDDD, we see the same in the leaked text of the SFDR published on November 6. There too, the European Commission proposes that certain financial institutions should no longer fall under the SFDR. This includes institutions offering individual portfolio management or investment advice. AIFMD fund managers offering products solely to professional investors would also be exempt from the newly proposed SFDR product categories. Several core disclosure requirements under the SFDR also appear to be significantly reduced. Examples include removing disclosure obligations related to PAI (Principal Adverse Impact) indicators and taxonomy alignment.
What remains of ESG?
Taking a step back by simplifying sustainability rules was certainly a good idea. But Omnibus I and the snapshots from the leaked SFDR show that the proposals go far beyond simplification and reducing administrative burdens. On the contrary: many pillars that support the entire sustainable finance framework introduced in 2018 are being effectively dismantled.
The leaked SFDR text also shows that the entire concept of “sustainable investment” is being removed from the SFDR. Few things illustrate the shifting political winds in Europe more clearly.
Randy Pattiselanno is Legal & Regulatory Consultant at the Projective Group.