Financial institutions may have to rely more heavily on their data teams and vendors to surface sustainability risks in their portfolios after the European Union watered down some of its key corporate ESG reporting regulations.
The EU’s Omnibus package announced earlier this year is intended to streamline the compliance processes for regulations including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Green Taxonomy. The intention is to reduce the reporting burden on thousands of companies who would have been required to disclose information on risks within their supply chains and operations – a process that would also have helped banks, investors and funds in their decision-making processes.Last week the European Parliament agreed to the proposed “stop the clock” delay of the CSRD by two years and the CSDDD by a year.
Reduced Burden
While observers have welcomed the reduction in reporting obligations that the package has brought to the CSRD, there is disquiet over the relaxation, postponement and delay to some provisions within the CSDDD.
This regulation, which is yet to be fully rolled out, requires companies to go beyond treating sustainability reporting as a box-ticking exercise and show they have taken the time to examine the impacts that they and their supply-chains have on the environment and human rights.
“There’s a lot of concern, both from investors and companies about what this changing, or unclear, regulatory landscape means, because at the end of the day, it’s not an ideal situation for business,” said Alexandra Mihailescu Cichon, Chief Commercial Officer at RepRisk, who described the potential for neutering the CSDDD as “short sighted”.
“Businesses need predictability, that’s what basically every business leader has been saying around the world.”
Investor Doubts
Investor associations with a total of almost US$7 trillion in assets told the European Commission that weakening these regulations too much could lead to a reduction in the data they need to make meaningful decisions about their investment and risk-management strategies.
The Investor Group on Climate Change, PRI and the European Sustainable Investment Fora, said the regulations ensured the reporting of “high-quality, comparable and reliable sustainability data” that is vital to “better manage the risks, impacts and opportunities”.
They argue that knowing the risks they face in their portfolios enables them to anticipate, engage and work to mitigate or prevent them. In doing so, this reduces their potential adverse impacts on the environment and society and also lowers the financial and reputational risks that that they face.
“We must not lose sight of the outcomes these regulations are set to support: accelerating investment towards a more competitive and sustainable economy and enabling investors and other market participants to better manage the risks, impacts and opportunities by facilitating access to high-quality, comparable and reliable sustainability data,” the Investor Group wrote in an open letter to the EC.
Cost Savings
The EC believes that the reduced reporting obligations under the Omnibus package will save companies in Europe €6.3 billion in administrative costs and galvanise another €50bn of public and private investment.Its introduction follows a “Competitiveness Compass” evaluation of the EU’s business policies, which followed a similar investigation by former European Central Bank president Mario Draghi. While it coincides with a roll back of ESG measures in the US, the EC says that its own regulatory changes were in response to local concern.
“The commission is recalibrating some EU rules in a growth-friendly manner that will enable more cost-effective delivery of our policy objectives,” the EC wrote on its website.
It “has listened to concerns of stakeholders, who consider that some sustainability reporting and due diligence rules are too complex and costly to implement, and of limited usefulness for investors and others, hindering the EU’s competitiveness and its investment drive.”
Companies Jettisoned
Among the proposed Omnibus measures is the removal of 80 per cent of companies from the scope of the CSRD, with most of those now exempted being smaller businesses. With most supply-chain companies falling into the small and medium sized enterprise bracket, Mihailescu Cichon worries that investors will now lack insights necessary to assess their suppliers and distributors, which account for a large proportion of firms’ carbon footprints.
“Simplifying rules doesn’t make risks disappear,” she said. “The data indicates that risk exposure is only growing, making data-driven risk monitoring crucial.
“Ultimately, supply chain due diligence isn’t just about compliance – it’s about building resilience. Forward-thinking companies and investors protect their operations, reputation, and long-term stability by proactively monitoring business conduct risks across their investments and supply chains.”
Data Solutions
In response, data and technology vendors, including SAP, have encouraged companies to remain focused on gathering data, arguing that even without the obligation to gather it for regulatory uses, the information will give them a competitive edge and lower their exposure to environmental risks.
“Compliance reporting is inherently backward-looking and can become a tick-the-box exercise – due diligence and risk management, on the other hand, are forward-looking,” said Mihailescu Cichon.
“Compliance is a must-have, but it’s not a natural driver of competitiveness. Smart risk management is – and that’s what the CSDDD is about. Investors and companies can sharpen their edge now by leveraging data-driven solutions for supply chain due diligence and risk monitoring.
“Investors and companies can sharpen their edge now by leveraging data-driven solutions for supply chain due diligence and risk monitoring.”
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