By: The Eurosif Policy Team

The European Commission established economic growth, competitiveness, and the decarbonisation of the EU economy as key priorities of its new mandate. These objectives will require the bridging of a €750-800 billion investment gap identified by the Draghi report through several flagship initiatives, including the Clean Industrial Deal and the Savings and Investment Union. The “Omnibus I” simplification package is likely to weaken the rules specifically designed to help investors to close this financing gap. We call on EU policymakers to preserve the objectives of these rules and to amend the European Commission proposals accordingly.

Sustainable finance: directing investment towards a just transition

Investors need reliable and comparable corporate disclosures to inform their investment decisions. The EU Taxonomy attempts to provide clarity on whether investments can be considered as sustainable by providing criteria assessing their underlying environmentally sustainable economic activities. The Corporate Sustainability Reporting Directive (CSRD) aim to provide investors with standardised sustainability data on companies’ risk exposure to environmental or social events which may impact their financial performance, as well as the impact of their activities on the environment and society. This “double materiality” perspective and disclosures across Environmental, Social and Governance topics, are the cornerstone of the EU sustainable finance framework.

The Corporate Sustainability Due Diligence Directive is the only set of EU sustainable finance rules which introduces a behavioural obligation “to do” while facilitating quality and reliable corporate disclosures. It requires the largest companies to set transition plans including climate targets, which are essential for accelerating industrial decarbonisation. It also introduces environmental and human rights due diligence requirements, which aim to prevent serious environmental harm and human rights breaches. These rules also aim to facilitate companies’ assessment of risks and impact of their own operations, across the value chain. They also provide them and investors with decision-useful information needed to scale-up investments for industrial decarbonisation and sustainable growth.

While the EU sustainable finance framework was challenging to implement, evidence shows it is starting to deliver; by 2024, European companies had already reported €440 billion of Taxonomy-aligned capital expenditure. This is why, before the publication of the Omnibus proposal, Eurosif, along with IIGCC and PRI, gathered 212 signatories, including 163 asset managers and asset owners with €6.6 trillion assets under management, in a  calling for the preservation of the integrity and ambition of the EU’s sustainable finance framework.

Chucking out the baby, keeping the bathwater

With its Omnibus proposals, the European Commission aims to boost EU competitiveness. However, if adopted in their current shape, these proposals could have detrimental impacts for investors and for the scaling-up of sustainable investments.

The CSRD and the EU Taxonomy were designed to improve the availability, comparability and reliability of corporate sustainability-related disclosures. However, the Omnibus proposals scale back the coverage of CSRD and EU Taxonomy mandatory reporting by about 80%. This would leave only the largest EU companies within scope and the rest to report under a voluntary regime. Even if voluntary reporting was abided by, the Commission proposal limits it to the data points included in the voluntary SME standard (VSME). Meanwhile, this standard is a de facto simple questionnaire designed for very small and micro-sized companies. Such an approach would severely limit access to comparable and reliable sustainability data from small to mid-size companies, making them less attractive investments. If retained, a “value chain cap” would even prohibit investors from asking companies that are out of the scope of the CSRD for any information beyond this simplified questionnaire.

The CSDDD as adopted last year, requires companies to adopt a risk-based approach to due diligence and to publish their transition plans. By limiting due diligence to the direct suppliers of companies, the Omnibus deviates from well-established international due diligence standards like the OECD Guidelines and UN Guiding Principles, which have already been widely adopted. Forward-looking metrics such as transition plans and climate targets are key for investor decision-making, to assess the credibility of companies’ transition efforts. Deleting the obligation in the CSDDD for the largest companies to implement such plans – as is currently proposed – may result in window dressing and undermine the reliability of related disclosures for investors. It may also slow down the industrial transition to a low-carbon economy.

Stability and consistency for true simplification

Members of the European Parliament and EU Member States should carefully avoid surface-level simplifications that may create additional complexity for all stakeholders. In addition to the drawbacks for investors, highlighted above, the proposed changes are also penalising the first movers who have already prepared their sustainability reports and creates significant regulatory uncertainty for those who started working towards compliance. The first year of reporting is always the most investment intensive as it requires a first materiality assessment and the setting up of internal procedures and systems. Changes to the reporting standard will result in additional costs for companies.

EU policymakers should strive to make simplifications that will truly benefit the industry and facilitate the achievement of the EU’s decarbonisation and competitiveness objectives. Investors acknowledge the need for simpler rules and streamlining disclosures. However, this can be achieved through, for example, more proportionate and fit-for-purpose mandatory reporting standards for small mid-caps, leveraging on the standard for listed SMEs (LSME) already developed by EFRAG’s. In parallel, the review of the existing standards for large enterprises (ESRS Set 1) should streamline superfluous disclosures while preserving the data points most needed by investors to identify the risks, impacts and opportunities of their investments.

As noted by the Draghi report, competitiveness and decarbonisation are deeply intertwined. Sustainability facilitates job creation, industrial and financial resilience, and strengthens the EU’s competitive edge. A robust, consistent and stable sustainable finance framework is the basis on which investors can contribute to channeling capital towards the transition to a low-carbon economy and is key to the long-term prosperity of the EU.

About the authors:

The Eurosif Policy Team is comprised of Pierre Garrault, Senior Policy Adviser; Alicia Woodall, Senior Policy Adviser, and; Anne Risse, Junior Policy and Communication Officer.

Eurosif’s membership is comprised of Sustainable Investment Fora (SIFs) from across the EU, Switzerland and the United Kingdom. Most of these SIFs have a broad and diverse membership themselves, including asset managers, institutional investors, index providers and ESG (Environmental, Social and Governance) research and analytics firms. Eurosif’s activities involve contributing substantively to public policy and conducting research that enables a better understanding of sustainable investment and the obstacles encountered by sustainability-oriented investors. Eurosif and its members are committed to the growth and integrity of meaningful sustainable investment flows and support the ambition of European policymakers in enabling a fully transparent sustainable investment market through appropriate and well-designed regulation and industry practice.