Financial Markets & Investor Protection
Less is more? Sustainability rules are being simplified
Published on 26 February 2025
Rumours have been flying ever since the President of the European Commission, Ms Van der Leyen, announced a wave of simplification of red tape to bolster the competitiveness of European businesses in November 2024. The promise came as a response to a landmark report on how to reignite economic growth in the EU, released earlier that year by Mr Draghi. Among the roadblocks to competitiveness outlined in the nearly 400-page document, the EU's "large regulatory flow" was identified as one of the main factors hindering growth. In particular, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), recent laws on corporate transparency and accountability regarding environmental and social factors, were pointed out for the heavy regulatory burden they would impose on European businesses.
Summary
Stop the clock
On 26 February, the European Commission finally lifted the veil on how the rules would evolve. The anxiously awaited Omnibus materialised in not one, but three separate legislative proposals.
The first, shorter text proposes delaying the application of the CSRD by two years and that of the CSDDD by one year. In this proposal, the European Commission requested a fast-track negotiation to swiftly adopt these delays and provide legal clarity to businesses while broader reforms are being discussed.
The second legislative text introduces more profound modifications. Under the Commission’s proposal, the number of companies required to report on their environmental and social impacts will be drastically reduced. The CSRD will now apply only to firms with more than 1,000 employees and either a turnover above €50 million or a balance sheet total above €25 million. These much higher thresholds would effectively shrink the directive’s scope by 80%, according to the lawmakers. Fewer companies will now have to report on a reduced number of data points.
Out-of-scope companies, the European Commission highlights, will still be able to report on a voluntary basis. Additionally, a “value-chain cap” would limit the amount of information requested from smaller companies by in-scope companies. Sector-based reporting standards are no longer slated to be adopted by the European Commission, and the possible shift from limited assurance to reasonable assurance has been discarded as well.
Where does that leave banks?
Simplifying reporting rules is not necessarily detrimental. The CSRD, which has not yet been transposed into Luxembourg law as of this article’s publication, aims to improve corporate transparency on sustainability risks. However, the European Commission’s proposed changes will significantly limit the scope of sustainability disclosures.
This means banks and financial institutions will have access to less sustainability data from their corporate clients. The revised rules create a potential blind spot in financial institutions’ risk assessments. Larger corporates still in scope will report on less information, as the number of required data points will be cut by almost 70%, according to the Commission. While this reduces compliance costs, it also risks making sustainability assessments less robust.
Another key change for banks concerns the Green Asset Ratio (GAR), a metric measuring the sustainability of their balance sheet. Under the new proposal, banks will be able to exclude from their GAR calculations any exposure to companies that fall outside the new CSRD scope, reducing the portion of their portfolios covered under the EU’s Taxonomy reporting obligations.
What’s next?
The changes proposed by the European Commission are not binding, yet. The texts composing the Omnibus package will have to be approved by both the European Parliament and the Council of the EU. Further changes might be introduced along the way as the negotiations proceed.
Each legislative text will be discussed separately within the European Parliament and Council. The proposal delaying the CSDDD and CSRD is likely to advance rapidly to provide firms with legal certainty, whereas discussions on substantive amendments may take longer.
In the coming weeks, the ABBL will discuss these proposed changes with its members to assess their potential impact and coordinate the banking sector’s response.
By Alexandre Dias and Thomas Collin, Advisers – Sustainability at the ABBL.