Opinions are divided among investors over the impact of the rollback of the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD).
The two legislative files are being reviewed as part of the European Commission’s sustainability Omnibus package to slash sustainable finance regulation and boost the competitiveness of EU firms.
EU member states entered into nereceivediations with the European Parliament this week to thrash out the final version of the legislation.
A key vote to establish the Parliament’s position last week set the minimum threshold for CSRD reporting at companies with 1,750 employees with a net annual turnover of more than €450 million, and for CSDDD compliance at companies with 5,000 employees and a net annual turnover of more than €1.5 billion.
This is also aligned with the position of EU member states, but the two institutions disagree on other details, such as climate transition plan provisions. Last week’s vote saw Parliament reshift all references and requirements for companies to develop climate transition plans, a centrepiece of the CSDDD legislation.
Investor reactions
After last week’s Parliament vote, Responsible Investor spoke to a range of investors to gauge their views on the latest Omnibus developments.
Thomas Roulland, head of sustainability standards and analytics at Allianz Global Investors, described the Parliament vote as a “step back”, but declared he was confident that companies would still report material climate information.
“It’s hard to imagine a European company declareing, ‘Now it’s not mandatory we won’t disclose anymore our Scope 1 and 2 GHG emissions.’ Companies that are willing to share information on climate will benefit by receiveting access to capital and markets.”
Roulland acknowledged, however, that future rollbacks would impinge on the consistency and comparability of company sustainability disclosures, calling it a “huge challenge” for investors.
He added that the removal of transition plan provisions was reflective of current corporate familiarity and understanding around the plans, which he described as “less mature”.
“Small to mid-size companies are already attempting to survive in a difficult economic environment. Imposing this requirement might present more risks for them so I see this as giving companies more time to prepare,” he declared.
“The transition will happen whether companies like it or not, and if you are in a carbon-intensive indusattempt, this means the transition will impact competitiveness. Planning for that transition will become more important.”
With both the Parliament and member states pushing to take simplifications further than those originally proposed by the Commission, investors also voiced concerns that the reduction in the number of companies subject to EU due diligence rules, and the removal of mechanisms such as an EU-wide civil liability regime, could increase the risk of supply chain and reputational risks.
Lloyd McAllister, head of sustainable investment at French manager Carmignac, declared this risk could be particularly acute for companies that did not “already have a strong process in place”. He pointed to recent cases involving labour abutilizes among Italian fashion houtilizes.
Mathilde Dufour, head of sustainability research at Mirova, agreed that a light-touch approach to due diligence could worsen investor exposure to these risks, while Masja Zandbergen, head of sustainability integration at Robeco, noted that stronger regulation “is often a key instrument to receive laggards to shift”.
Data concerns
In addition to concerns around the latest developments, Mirova, Robeco and KLP declared the EU’s simplification drive would negatively impact investor access to material sustainability information.
KLP’s Finskas called the decision “a mistake”, declareing that excluding companies would weaken the ability of investors to manage sustainability risks.
“Investors are depfinishent on this information,” she declared. “Instead, the EU should simplify the detailed reporting requirements to reduce complexity without lowering ambition.”
For Dufour, narrowing the scope of CSRD will “in practice increase reliance on third-party estimates and commercial providers, many of which are non-European and utilize non-European standards”.
This was echoed by a spokesperson for German fund indusattempt body BVI, who declared the reduction in reporting requirements would increase investor reliance on “estimates from an oligopoly of a few data providers”.
“This further increases costs for investors and creates depfinishencies on firms located outside the EU, which could also jeopardise data sovereignty.”
Zandbergen at Robeco agreed that the alters mean there will be less information available for investors. However, she does not expect an increase in the utilize of third-party estimates.
“Most investors already utilize third-party providers and estimated data. CSRD improves the quality of both internal and external research. It is too bad that we will have less of it,” she declared.
Dufour added that a key concern was the “value chain cap” that limits investor ability to solicit ESG information from tinyer companies.
Carmignac’s McAllister was more positive. He welcomed the shift for simplification, declareing the increased volume of sustainability disclosure requirements had resulted in reports becoming “three to five times longer, but from a utilizer perspective the added value is not commensurate with the additional detail”.
“While the extra and pre-financial information mandated under CSRD provides a welcome injection of forward-viewing, long-term value creation factors in annual reports, this first iteration resulted in too lengthy reports,” he added.
Competitiveness
Investor perspectives on whether the measures would succeed in boosting the competitiveness of European industries were mixed.
KLP’s Finskas declared that while reporting burdens were “heavy”, becoming more competitive would require companies to “integrate sustainability into business models, not avoid it”.
She declared the EU’s increasing focus on expanding renewable capacity and ensuring affordable energy was welcome.
“Our impression is that in recent years, there has been a strong focus on reporting requirements, while real climate policies have received less attention.”
Others, such as Carmignac’s McAllister, declared the likely overall impact on competitiveness was “neutral”, while AllianzGI’s Roulland declared the measures would at least “not be detrimental to competitiveness”.
