Has the Omnibus Package impacted ESG regulations going forward?
The EU recently issued the Omnibus Package, including a number of changes aimed at reducing complexity and streamlining ESG-related regulations. However, were these changes needed?
Zeidler senior associate Katrina Crampton believes that the aim of reducing administrative burden, particularly for SMEs, is understandable, but highlights a significant change in the EU’s sustainable finance approach.
Some of the regulations impacted by the package are the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and the Taxonomy Delegated Act. As part of the changes, around 80% of companies will be removed from the scope of CSRD, with only companies that have over 1,000 employees and either have a turnover of €50m or a balance sheet over €25m remaining subject to the rules.
Elsewhere, sustainability requirements will be voluntary reporting for SMEs, European Sustainability Reporting Standards (ESRS) will be revised and simplified, and more.
Crampton believes that the narrowed scope of the package undermines the ambitions of the EU Green Deal. This deal sets out the ambition for Europe to become the first continent to become climate neutral. The main milestones of this mission are to have no net emissions of greenhouse gases by 2050, economic growth decoupled from resource use, and ensure no person or country is left behind.
She added, “Clarity and consistency in sustainability reporting requirements are essential and frequent regulatory changes, even in the name of simplification, may create uncertainty for market participants who have already invested heavily in their compliance infrastructures. It is important to ensure that simplification does not come at the expense of credibility, where sustainability reporting and due diligence become mere ‘box-ticking’ exercises, which would threaten investor trust in the EU sustainable finance framework.”
One of the biggest concerns with CSRD was its complexity. Last year, several leaders across Europe voiced their concern with CSRD and called for changes to its scope and requirements. Some countries even missed the deadline of the initial implementation for the regulation.
The changes to the CSRD have made it easier to comply, with longer deadlines and a smaller scope of application. Similarly, changes to ESRS will also help simplify the overall framework and clarify which data points are mandatory and voluntary. However, there are some companies that would likely have felt the impact of the late changes. “Companies that were preparing to comply under the original timeline may now need to adjust internal planning and resource allocation, and uncertainty about future amendments could complicate long-term compliance strategies.”
Will the impact on ESG compliance be positive or negative?
It is still too early to assess whether these changes will be a positive influence on ESG compliance. However, when looking at the Omnibus Package, there are two aspects to consider when assessing the impact of the changes, Crampton explained. These are the implications for corporates and the downstream effects on the asset management industry.
On the corporate side, Crampton said, “We recognise that certain measures – such as the delay in CSRD reporting – may be necessary to give smaller undertakings more time to prepare for compliance, which may lead to a positive impact. The Commission has estimated that the proposed changes to the CSRD could result in cost savings of approximately €4.4bn per year. However, cost reductions must still be balanced against the potential consequences for the broader sustainable finance framework.”
As for the downstream impact, while investment funds were not directly within the scope of CSRD or CSDDD, Crampton added, firms with ESG-focused strategies were expecting to rely on corporate sustainability disclosures for their own reporting obligations. But if investee companies now have less frequent or less detailed reporting, it could also pose challenges for firms in collecting reliable data. It could mean asset managers and data providers need to rely more on estimates for their SFDR and Taxonomy Regulation requirements. “This is likely to be particularly challenging for funds with strategies focused on SMEs, where the availability of high-quality data is already limited.”
Crampton added, “Ultimately, the quality of ESG compliance will only improve if market participants continue to pursue implementation of their existing compliance and due diligence plans, rather than viewing the proposed delays as an opportunity to scale back these efforts.”
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