by Philip Mitchell, Senior Sustainability Advisor, Formue
Turkeys rarely vote for Christmas. And we’re not surprised by the view they take. Nobody seems truly satisfied with the recent Omnibus proposal, with press coverage and LinkedIn opinions oscillating between two extremes.
On one side we have investors angry at the loss of improved data, joining hands with consultant and activists who believed CSRD would result in better sustainability outcomes…and maybe some fees. On the other side is a combination of company management, lobbyists and populist politicians happy to see anti-competitive red tape disappear.
I sit in the middle of this debate and my conclusion is clear: the Omnibus dilution of CSRD should be a good thing.
Much of my time over the past two years has been preparing for how we will report under the new rules, establishing a double-materiality framework that withstands audit and improving our reporting of KPIs that I think will make us a better business. Simultaneously, I am part of a private company trying to grow profitably. Specifically, I want to help our clients invest sustainably and to fit their preferences with the best funds we can find, in the context of the challenged world we live in.
Regulations are not established to enhance profits for the organisations they regulate, we get that. But when the costs get in the way of a sound purpose, reason should prevail over principles and passion. In my (reasonable) opinion, there are three reasons why we shouldn’t oppose a dilution of CSRD.
More is more; not better
First, it’s unclear that data would become materially better under CSRD. I can see why investors were excited. Initial estimates suggested over 60,000 companies would be in scope for CSRD reporting. Hundreds of new datapoints becoming obligatory of which some would have been particularly valuable: “Financial capex allocated to transition action plan” was a big one!
Based on the initial proposed changes, almost 50,000 companies will be exempt from CSRD reporting, but this doesn’t translate into an 80% reduction in coverage: the biggest market cap companies will still be reporting. According to Goldman Sachs1 roughly three-quarters of Global stock market value is already covered by the larger companies that are still in scope.
Moreover, international reporting standards and voluntary disclosures have greatly improved in recent years, enhancing the data from many companies now out of scope for CSRD. For example, all ISSB jurisdictions now include Scope 3 reporting in their disclosures and almost half of all European companies (and 80% by market cap) already have independently assured sustainability reports2.
In private markets the trend is also rapidly improving. Our firm has to report on over 30 sustainability KPIs to its Private Equity owners, and globally more than 6,200 private companies are now included in the EDCI benchmark.
End-investors need a simpler choice
Second, matching sustainability preferences to retail investors needs a major overhaul. In theory, diluting CSRD means the likelihood of greenwashing and potential exposure to climate risks may increase. It also makes it hard for retail investors to fine-tune their investments to underlying exposures: CSRD was very much the engine that drove SFDR and Mifid II.
But, as we have seen from recent consultations around the reform of SFDR, the process is not fit for purpose and the challenge to define “sustainable” activities remains unsolved. I don’t think collecting up to 1,100 datapoints from companies was going to fix things.
Principal Adverse Impact Indicators (PAIs) can be a very useful screen for fund selection and engagement with fund managers, but I don’t meet many clients who know exactly how much they wish to skew their sustainable choices into “low emissions to water” or “low gender pay gap”.
Some sustainability topics are also subjective. We are seeing varying degrees of “moral flexibility” around Defence spending and Nuclear power currently: is it worth trying to perfect reporting if interpretation will always be required?
Reporting is good, action is better
Third, European corporates need help growing sustainably. For European companies, the most obvious near-term impact of the Omnibus proposals will be freeing-up time and money in finance departments. For medium-sized companies, the annual cost of compliance was roughly €100K3 with many larger companies likely to spend about €1m on annual reporting and assurance. The Draghi report of 2024 flagged CSRD as being a particularly heavy regulatory burden for the EU, and half of companies affected said they felt unprepared.
Given that many companies, including ours, have already established “double materiality” reporting models and started voluntarily reporting along CSRD standards, this will free up time and money to actually implement sustainable strategies, rather than fine-tuning reporting. The CSRD dog barking has almost had the same effect as biting.
European stock markets have already shown better performance vs the US since Omnibus proposals were launched, and one could argue that a reduced regulatory burden has helped their prospects. But as the chart below shows, European performance over the past year has been very dependent on a re-rating and dividends to drive its returns, rather than actual earnings growth.
Clearly, we don’t want an improvement in European earnings growth to come at the expense of sustainability goals. I absolutely want to hold company management “feet to the fire” when it comes to ESG ambition and the EU proposal this week to scrap the need for obligatory transition planning is, I believe, misguided. But if we have learned anything from the past 5 years, its that sustainability needs to be profitable to drive widespread adoption – CSRD in its original form was relying too much on sticks rather than carrots.
1 GS Sustain – Measuring the globale scope of CSRD and CSDDD↩
2 OECD, Global Sustainability Report↩
3 Source: Novata↩
