It remains a concern that efforts to simplify regulations may diminish their effectiveness, stripping them of their substance and effectively representing a step backwards in regulatory standards for sustainability.
In order to strengthen companies’ ESG (Environmental, Social and Governance) practices and improve the reliability and comparability of ESG data, the European Union (EU) has implemented numerous regulations. Although these measures intend to regulate the responsibility of actors and encourage transformative attitudes based on reporting, this multitude of texts has considerably broadened the reporting requirements, thus making the process more complex.
To meet this challenge and thus reduce the bureaucratic complexity imposed on businesses, the President of the European Commission, Ursula von der Leyen, has proposed Omnibus legislation in November 2024. The proposal aims to consolidate and simplify the Data Protection Directive. (CSRD, 2022, which strengthens non-financial reporting obligations for companies), the EU Taxonomy Regulation (2020, which classifies sustainable economic activities) and the Directive on due diligence on corporate sustainability (CS3D, 2024, which imposes a duty of vigilance to identify and address negative impacts across all value chains). While efforts to simplify administrative procedures are welcome, the proposed Omnibus legislation raises a crucial question: does it risk undermining progress made in sustainability reporting? Furthermore, given the complexity of these three regulations (CSRD, CS3D, EU Taxonomy) and the wider political context within the EU, can Omnibus legislation realistically achieve its intended objectives?
Consensus proves difficult
Although motivated by good intentions, consolidating these three frameworks to reach consensus seems complicated given the conflicting approaches and priorities of EU member states. For example, the CSRD has already had to face significant challenges during its development and implementation. At the end of 2024, just a few months before the publication of the first reports relating to the CSRD, certain European regulators are still calling for a relaxation of the CSRD framework. Ursula von der Leyen has highlighted the challenges posed by over-regulation for SMEs (small and medium-sized enterprises), while other leaders, such as former French Prime Minister Michel Barnier, have suggested a “moratorium” to delay enforcement of the CSRD in France. The former German Federal Minister of Justice, Marco Buschmann, has asked for a revision of the text concerning the CSRD. As consensus on the CSRD has not yet been reached, it is unlikely that Omnibus legislation bringing together these three regulations will be finalized in the short term. According to Forbes, the European Commission is expected to debate this issue in February 2025.
While the Omnibus Regulation aims to reduce the burden and cost of sustainability reporting for companies, CS3D goes beyond simple reporting and declarations. CS3D also requires companies to establish robust processes to identify and address human rights and environmental issues. Therefore, the scope of the Omnibus legislation must be clearly defined, and there are essentially two alternatives. As an overarching regulation, the scope of the Omnibus legislation could encompass that of the three regulations (CSRD, EU Taxonomy and CS3D), covering both reporting and aspects beyond reporting. However, such an approach would not reduce the burden on businesses. Alternatively, the Omnibus legislation could be limited to reflecting the common sustainability reporting and information requirements provided by the three regulations. The other subjects would then either be treated in the initial texts or “discarded”. This could result in a moderate reduction in burden and costs for companies, or conversely, oversimplification at the expense of strong ESG practices and high-quality reporting standards. Additionally, these regulations remain subject to possible modifications based on stakeholder feedback. Therefore, bringing these legislations together under a single framework proves to be a considerable challenge.
Simplification or deregulation of ESG reporting standards?
Against a backdrop of negative sentiment, fueled by sustainability regulations that are seen as a drag on European competitiveness and sovereignty, concern is growing that the Omnibus legislation is regressive. The CSRD, the EU Taxonomy Regulation and the CS3D which are each designed to complement the sustainability framework with distinct ambitions and scopes of application, could be reduced to “another” set of regulations. This change could prove counterproductive: lifting the burden on businesses at the expense of sustainability goals. For example, the final version of the first set of European Sustainability Reporting Standards (ESRS, CSRD Standards) has already been weakened, with fewer data elements and a closer focus on materiality by compared to its initial versions. Further simplifications, particularly on core CSDR concepts, could prove counterproductive and undermine efforts to establish strong sustainability practices.
Regulatory changes could penalize pioneers
The proposed Omnibus legislation has created significant uncertainty for businesses, sending troubling signals. Major changes to the CSDR risk penalizing early movers who have invested significant resources to adjust their strategies and weaken their proactive efforts, while laggards may, paradoxically, experience less disruption. For years, businesses have been encouraged to quickly adopt sustainability measures, but due to ongoing reviews, this advice now appears almost ironic. This dynamic echoes recent cases, such as that of European regulations on deforestation, where early adopters have been disadvantaged.
The CSDR implementation timeline varies by company size and starts with large companies. This incremental approach creates a learning curve, allowing smaller companies to leverage the experiences of larger companies, and potentially, reduce costs. Additionally, large companies have the opportunity to accompany and support their suppliers during the transition since CSRD requires supply chain information, if relevant. This encourages businesses to take a proactive approach to their efforts. However, uncertainties surrounding sustainability regulations have disrupted this chain of events, reducing the ability of early movers to influence others. This regulatory instability encourages companies to view CSDR and associated frameworks as mere compliance obligations rather than opportunities for strategic transformation. As a result, many companies may postpone their sustainability reporting preparations until the last possible moment.
Bad timetable for Omnibus legislation
The omnibus proposal exacerbates existing challenges. As of September 2024, 17 member states had not yet transposed the CSRD into their national legislation. Further delays are likely until the Omnibus process is finalized. Meanwhile, adoption of International Sustainability Standards Board (ISSB) standards is progressing rapidly, with 40% of global market capitalization and 50% of European trade already aligned with ISSB standards, outpacing the pace of slower implementation of CSRD. This presents a significant risk: if the adoption of the ISSB continues to spread faster in Europe than the CSRD, it could reduce the added value provided by the CSRD, such as dual materiality. Additionally, widespread adoption of the CSRD may prove more difficult, especially as the ISSB standards increasingly become the global benchmark for value chain transparency and product-driven reporting. investors. ISSB President Emmanuel Faber emphasized that the ISSB standards provide the type of information investors need more effectively than the CSRD.
Furthermore, the sectoral ESRS, scheduled for adoption in 2026 and aimed at providing more relevant information, could face further delays or compromise due to the Belgian Presidency’s focus on strengthening European competitiveness and wider adoption of ISSB standards, both globally and in Europe.
Conclusion
European regulators say their goal is to ease the reporting burden on companies – a positive and necessary goal – while supporting sustainability initiatives. However, there remains concern that efforts to simplify regulations may diminish their effectiveness, stripping them of their substance and effectively representing a step backwards in regulatory standards for sustainability.
Stability in sustainability regulations is crucial for businesses to effectively plan and adjust their operations. However, the uncertainties created by the proposed Omnibus legislation, combined with the current European political landscape, are sending negative signals to businesses. This situation penalizes early adopters, which could discourage them from complying with future ESG regulations. As a result, companies may begin to view sustainability reporting as simply a compliance obligation rather than a strategic priority.
Note: Crédit Mutuel Asset Management is an asset management company of the La Française Group, holding company of the asset management branch of Crédit Mutuel Alliance Fédérale.
