Commission delivers first phase of ‘simplification’ drive

Four out of five companies are set to be removed from the scope of an EU directive on corporate sustainability reporting, leaving only the 10,000 largest firms in Europe facing the obligation to publish details of their environmental footprint and the risks they face from factors such as extreme weather linked to climate change alongside financial data.

Commission Vice-President Valdis Dombrovskis sought to pre-empt criticism of a U-turn on Green Deal legislation adopted under Commission President Ursula von der Leyen’s first administration by pointing to “dramatic shifts in the geopolitical landscape”.

He cited the Trump administration siding with Russia this week to oppose a UN vote condemning the Kremlin’s war on Ukraine. “We need to treat these developments as a call to action,” Dombrovskis said.

“In short, we need to build a more competitive Europe,” he said as he presented the first of a promised “fleet” of so-called “omnibus” packages designed to meet the Commission’s goal of slashing red tape for firms operating in Europe by at least a quarter.

Greening the economy

The reporting directive was part of a plan to ‘green’ Europe’s economy by ensuring investors can – partly in response to growing public demand – channel pension funds and savings away from dirty, polluting industries and towards more sustainable activities like renewable energy, all of which are in the EU’s sustainable investment green list known as the ‘taxonomy’.

Dombrovskis said the system was never intended to be compulsory. “The taxonomy is meant to be voluntary for those companies which are claiming they are compliant with the sustainability targets [so] investors can be certain there is no greenwashing taking place.”

Speaking alongside the vice-president, Financial Services Commissioner Maria Luís Albuquerque insisted that this objective would not be harmed by exempting four-fifths of businesses from the reporting obligation.

“This does not mean 80% will no longer report, it just means that they won’t have to,” Albuquerque said, adding that the new voluntary reporting standard eliminates 70% of the data points that companies previously had to fill in.

The Brussels based European Consumer Organisation (BEUC) was unconvinced. The proposed changes “risk rendering the framework not fit for purpose and discouraging consumers from engaging in sustainable and climate transition investing”, it said.

“Over the past decade, the EU has become a global leader in sustainable finance by establishing strong rules which, despite their flaws, have allowed this innovative green funding area to flourish more than any other place in the world, pushing companies to accelerate their transition plans,” BEUC Director General Agustín Reyna said.

Supply chain visibility

But the changes set out today in the ‘omnibus’ proposal go beyond mere reporting obligations, which were at the core of the ‘simplification’ agenda announced by von der Leyen in the first days of her second term.

Even larger firms will be freed from the requirement under a related directive on due diligence to ensure that their longer supply chains are not tainted by exploitation of workers, human rights abuses or environmental destruction, with the requirement to screen partners now limited to direct suppliers.

And those immediate business partners, if they fall beneath the reporting threshold, will not be required to supply more than a limited range of information on the provenance of their goods, again to avoid placing a “disproportionate” administrative burden on them.

The EU executive also wants to scrap rules that apply the same civil liability for damage done to any firm operating in Europe, with any redress for victims to be decided at the national level.

The global charity Oxfam said the proposed changes would make an “empty shell” of the supply chain law. “Von der Leyen is taking a chainsaw to environmental and human rights protections,” said Franziska Humbert, a lawyer and policy advisor with Oxfam Germany.

“Without binding due diligence obligations, companies will not take responsibility – something the disasters of recent years have made painfully clear: collapsing textile factories, dam failures in mining, and pesticide poisoning on banana plantations,” Humbert said.

Stop the clock

To avoid regulatory chaos that could ensue with companies remaining subject to the existing laws as the European Parliament and governments in the EU Council negotiate the proposed amendments, the EU executive wants to rush through an emergency “stop the clock” bill that would suspend application of the reporting directive until 2028.

The same emergency procedure, with scant opportunity for parliamentary scrutiny, was used late last year to postpone the implementation of the deforestation regulation, another law designed to reduce the environmental impact of goods sold on the EU market.

To complete the first of a promised ‘fleet’ of omnibus packages, nine out of ten of companies – those importing less than 50 tonnes of certain materials such as steel and cement – are exempted from complying with the carbon border adjustment mechanism, an import levy based on the estimated carbon footprint of goods. The EU executive says 99% of associated greenhouse gas emissions are still covered by the levy.

Dombrovskis insisted that the EU’s “simplification agenda” did not amount to deregulation. “We are not changing our Green Deal goals and targets,” he said. The easing of reporting requirements would help deliver them in “a more efficient and loss less costly way”.