Sustainable finance reporting requirements must not be reduced at the expense of the environment

On 26 February, the European Commission published its much-anticipated first Omnibus package of proposals on sustainable finance. The aim of the package is to simplify and streamline regulation and reduce companies’ climate and sustainability reporting burden.

Finance Finland supports the proposed measures to improve the regulatory framework and underlines the importance of simplifying regulation and improving its user-friendliness. However, this work must not compromise environmental goals.

“Legislation must ensure that the green transition succeeds and Europe remains competitive, but we must not forget the role of nature capital. It must be considered in decision-making and promoted as a competitive factor”, says Finance Finland’s Legal Adviser Aleksi Kaakinen.

In an Omnibus procedure, the Commission makes simultaneous amendments to several EU regulations. The legal acts under review in the sustainable finance Omnibus include the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy Regulation and the Corporate Sustainability Due Diligence Directive (CSDDD) adopted last year. The package also includes a set of proposed changes to the EU’s Carbon Border Adjustment Mechanism (CBAM).

According to Kaakinen, the most significant changes proposed in the package concern the CSRD, which currently obliges companies to report on their environmental, human rights and social impacts annually.

“The Commission now wants to ease the burden of this reporting obligation for a large number of companies. The new scope would exclude all companies with fewer than a thousand employees, although these companies would still have the possibility to report voluntarily”, Kaakinen explains.

The change would reduce the number of companies subject to the CSRD by around 80%.

The financial sector must be considered in light of its specific characteristics

The EU wants to focus reporting obligations on the largest companies, which are more likely to have the biggest impacts on people and the environment. According to Kaakinen, this could create discrepancies.

“The changes would mean that large companies would still be obligated to collect data from the smaller companies in their value chain, but these smaller companies would be exempt from the reporting requirements”, says Kaakinen.

Another problem is the unpredictability caused by erratic EU policy.

“The financial sector and European companies in general have not only managed to carry out their sustainability reporting very successfully but also made considerable investments in it. Now the Commission wants to prune the still relatively fresh legislation with a heavy hand.”

The CSDDD will also be amended. Systematic due diligence requirements would be limited to the company’s own operations, its subsidiaries and the first tier of the production chain.

The Omnibus package also includes a proposal to remove the review clause for financial services and the investment activities of regulated financial undertakings, which requires the Commission to report on the need for additional due diligence rules for financial services. This is a change that Kaakinen welcomes.

“It is unclear how suitable the CSDDD would be for financial sector companies as the financiers and insurers of society. It is vital that the financial sector is considered in light of its specific characteristics”, says Kaakinen.

Sustainability measures must not be compromised

The Taxonomy Regulation helps companies direct their operations towards sustainable activities. It is also proposed to undergo fundamental changes, including an 89% reduction in reported data points for credit institutions.

“This is excellent news in terms of reporting requirements that do not genuinely promote the transition to sustainability. But I question whether such changes of course are predictable enough for in-scope companies”, Kaakinen says.

The Omnibus package’s legislative proposals still require the approval of the European Parliament and the Council. At this point, they are only the Commission’s proposals.

“We can only hope that the co-legislators and their stakeholders can find a sustainable consensus agreeable to all despite the tight schedule and political turmoil”, says Kaakinen.

“The financial sector welcomes the streamlining of regulation with open arms, but we very much hope that the Commission has a clear vision of how to promote the green transition and prevent biodiversity loss. There are other ways to pursue effective policies than to burden companies with reporting obligations.”