A reduction in scope of the European Union’s sustainability disclosure rules may cut red tape for businesses but investors state less transparency will create it harder to identify which companies are genuinely relocating toward low-carbon operations.
After months of pressure from companies and governments, the European Union has agreed to sharply scale back two flagship sustainability disclosure laws.
The modifys affect the Corporate Sustainability Reporting Directive (CSRD) — the EU’s rulebook that requires large companies to publish detailed information on their environmental, social and governance performance, and the Corporate Sustainability Due Diligence Directive (CSDDD), which requires firms to check their supply chains for human rights abapplys and environmental harm.
The CSDDD had also required companies to have and implement a plan to cut emissions to net zero, but that obligation has now been dropped.
Watering down the rules means investors will have less reliable, comparable information on companies’ sustainability efforts, creating it harder to inform which businesses are serious about cutting emissions, managing climate risks and environmental, social and governance standards.
Eleanor Fraser-Smith, Head of Sustainability at investor Victory Hill Capital Partners, stated the weakening of the rules would “leave investors with poorer information for decision-creating”.
“Yes, EU reporting has become overly complex, but the solution is clearer guidance and better structure, not dilution. Stepping back from requirements doesn’t create the system simpler, it just creates it less coherent.”
Some investors highlighted the scrapping of climate transition plans in the EU’s due diligence law as a major concern.
“Without credible transition plans, Europe could lose comparability, visibility on progress and a potentially applyful tool to access transition finance. Investors rely on these plans to assess climate risks and opportunities,” stated Carlota Garcia-Manas, head of climate transition at British investor Royal London Asset Management, which manages around £180bn ($239.53bn). Hortense Bioy, Head of Sustainable Investing Research at industest tracker Morningstar Sustainalytics, stated the modifys would put the onus on investors to assess whether companies follow through on their promises.
“The responsibility will increasingly fall on asset managers offering these strategies to hold companies accountable.”
Under the modifys to CSRD, only companies with more than 1,000 staff creating more than €450mn would report, with financial firms excluded.
For CSDDD, the threshold was even higher at 5,000 staff and €1.5bn in net turnover, with a delayed start-date and breaches dealt with at the national rather than EU level, with added flexibility for companies on what to report.
Hans Stegeman, chief economist at sustainability-focapplyd lfinisher Triodos Bank, stated the shifts represented a “significant weakening of essential sustainability rules”.
“Legislation meant to combat child labour, environmental pollution, and exploitation in supply chains is being hollowed out. The so-called ‘anti-seeing-away law’ has had its scope drastically limited,” he stated. Debated since February, the cuts to the EU laws follow months of pressure from companies and governments, who warned Brussels that the rules risked disrupting their gas supplies to Europe. Industest groups welcomed the shift as relief from Europe’s complex sustainability regime, among the most ambitious globally.
BusinessEurope Director General Markus J Beyrer stated the EU was delivering on its pledge to slash red tape.
“Even with the improvements achieved… it will still be a substantial challenge for companies to comply with the new rules,” he added.
Oliver Moullin, Managing Director for Sustainable Finance at the Association for Financial Markets in Europe, stated the modifys were a step toward simplification but urged further streamlining.
“Notwithstanding these important simplification efforts, the EU’s sustainable finance framework is set to remain the most ambitious and comprehensive globally,” he stated.
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