The European Central Bank (ECB) released a new opinion on the European Commission’s proposals to simplify and reduce sustainability reporting and due diligence requirements for companies. While welcoming the goal of simplifying requirements for companies, the ECB warned that some of the Commission’s plans could significantly increase risks for investors, the economy and the EU’s sustainability goals.
Among the key recommendations in the central bank’s opinion was a proposal to significantly limit the planned reduction in scope of the companies covered by the EU’s Corporate Sustainability Reporting Directive (CSRD), with the ECB recommending mandatory sustainability reporting requirements for companies with 500 or more employees.
The ECB’s publication follows the release in late February of the Commission’s Omnibus I package, aimed at significantly reducing the sustainability reporting and regulatory burden on companies, with proposals for major changes to a series of regulations including the CSRD, the Corporate Sustainability Due Diligence Directive (CSDDD), as well as the Taxonomy Regulation, and the Carbon Border Adjustment Mechanism (CBAM).
The CSRD was initially planned as a major update to the EU’s Non-Financial Reporting Directive (NFRD), the previous EU sustainability reporting framework, significantly expanding the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000. Based on new underlying European Sustainability Reporting Standards (ESRS), the CSRD also introduces more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk.
The omnibus proposals, however, would significantly change the scope and coverage of the CSRD. Key proposed changes to the CSRD in the package include a dramatic reduction in scope, moving the regulation to cover only companies with more than 1,000 employees and either revenue greater than €50 million net turnover, removing an estimated 80% of companies from the regulation’s sustainability reporting requirements. In addition to the move to remove most companies from the CSRD, the Commission also plans to revise the ESRS, with the aim of substantially reducing the number of data points required by the sustainability reporting standards.
In the central bank’s opinion, while the ECB states that it “supports the Commission’s efforts to streamline and simplify sustainability reporting and due diligence requirements,” it notes that “the availability of harmonised, standardised and reliable sustainability information” is essential to help ensure the flow of capital to activities supporting the EU’s sustainability goals, and to allow “market participants to understand and price sustainability-related financial risks,” while preventing “investment decisions being taken on the basis of incomplete information.”
For its own role, the ECB noted that the availability of high-quality sustainability-related information is required for its roles in ensuring financial stability and managing monetary policy, stating that “physical and transition risks related to the climate and nature crises have profound implications for both price and financial stability through their impacts on the structure and cyclical dynamics of the economy and the financial system.”
The ECB opinion takes issue with the Omnibus’s proposed reduction in scope, removing 80% of companies from coverage under the CSRD, stating that “this amendment could significantly limit stakeholders’ access to important information,” and warning of “unwanted outcomes,” including reducing the overall availability of sustainability information, including information on GHG emissions – noting that some significant emitters, including fossil fuel companies, will fall outside the scope of reporting. The ECB also warned that some companies currently providing sustainability information under the NFRD system will no longer be covered under the CSRD, as well as many credit institutions, with the ECB stating that “it is worth noting that ESG risks are not necessarily proportionate to an institution’s size.”
In its opinion, the ECB suggests changes to the Omnibus proposal, recommending that instead of cutting off companies smaller than 1,000 employees from the scope of the CSRD, companies with 500-1,000 employees also be subject to mandatory sustainability reporting requirements, but applying “dedicated simplified sustainability reporting standards that are proportionate and relevant to the capacities and the characteristics of such undertakings and to the scale and complexity of their activities.”
The ECB also notes that the Omnibus proposal to increase the scope of third-country companies covered by the CSRD would generate data gaps between EU and non-EU companies and create a competitive disadvantage for EU companies, and recommends that this proposal be eliminated.
While welcoming the EU’s proposal to establish voluntary sustainability reporting standards for smaller companies not under the scope of the CSRD, the ECB also warns of potential dangers, such as self-selection, with only companies performing well choosing to report, and greenwashing risk from companies selectively choosing which sustainability aspects to report.
The ECB proposes suggestions for the initiative to reduce the ESRS data points, noting that it its important to “retain data points that are relevant from the prudential and monetary policy perspectives.” Specifically, the ECB recommends retaining most climate change data points (ESRS S1), along with important biodiversity and ecosystems data points (ESRS S4), as these are particularly important essential for assessing and managing physical and transition risks for companies and financial institutions.
Among the changes introduced by the Commission with its Omnibus proposal was an announcement that it will not introduce planned sector-specific sustainability reporting standards under the CSRD. The ECB, however, notes the importance of sector-specific information, such as for allowing financial institutions to assess and compare companies in the same sector on transition preparation. In its opinion, the ECB recommends that in the absence of sector-specific standards, the Commission should “consider adopting sector-specific guidelines in order to foster a common approach to implementing the ESRS within individual sectors. “
Click here to access the ECB opinion.
