Hooray for simplifying regulation! But obligations must be streamlined thoughtfully, without compromising environmental goals

The European Commission revealed  its Sustainability Omnibus package of proposals to simplify EU rules and reduce sustainability reporting burdens in February. This objective is commendable: streamlining overly burdensome regulatory obligations is a welcome move that often leads to cost savings without compromising the green transition.

However, erratic and hastily prepared regulation comes at a cost. When obligations are reduced in one area, problems can emerge in another.

The Commission has proposed to reduce the scope of the Corporate Sustainability Reporting Directive (CSRD) to include only large undertakings with more than 1,000 employees. The CSRD requires companies to report on their environmental, human rights and other social and governance impacts annually.

Financial sector companies can only make truly sustainable decisions when they have access to data from their client companies. Without this data, it is impossible for them to reliably assess the sustainability of the projects they finance.

The largest companies have the biggest impacts on people and the environment. But no company – large or small – exists in a vacuum. Even after the proposed changes, large companies would still have to collect data from the smaller companies in their value chain, but some of these smaller companies could then be exempt from the reporting requirements due to their size. This would restrict the availability of data, forcing companies to replace  missing data with estimates and calculations, which are never as accurate as real/actual data.

The financial sector is subject to extensive sector-specific regulation and reporting requirements, which become harder to fulfil if access to data is restricted. This is why risk management regulation, among others , would require some fine-tuning.

Regulations such as the Capital Requirements Regulation and the Solvency II Directive on the capital requirements of banks and insurers and the Sustainable Finance Disclosure Regulation require financial sector companies to collect data from their client companies and to report on their own operations. The financial sector should not be subjected to reporting and data collection requirements that are significantly more burdensome than those of real economy companies, regardless of company size. Financial sector regulation should therefore also be reviewed.

Incomplete data also reflects directly on how well financial sector companies are able to meet their risk management requirements. At worst, incomplete data can raise their capital requirements, which in turn reflects negatively on real economy companies.

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Growth and cost savings must not be sought
at the expense of future generations.
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Reporting requirements must not be reduced in a way that slows down climate action or efforts to combat biodiversity loss. The green transition is one of the EU’s key competitive advantages. Growth and cost savings must not be sought at the expense of future generations.

Simplifying regulation is a welcome development. Effective policies can be enacted in many other ways than by increasing reporting requirements. Going forward, the Commission should have a clear vision of how to promote the green transition and prevent biodiversity loss. As it stands, the Commission’s Sustainability Omnibus package is a good starting point. But the proposal requires further thought and refinement to ensure that it works for all parties – including future generations..