In today's newsletter, as promised, I present my opinion on this draft regulation. If you are interested in the detailed changes proposed by the European Commission, please refer to the previous issue, already published on the blog. MATERIALITY ACADEMY. I would like to emphasize that my opinion is personal and does not represent the position of any organization with which I am associated, in particular EFRAG, SEG, and ESMA.
The changes proposed by the European Commission to the CSRD directive are not simplifications, but deregulation. The situation is different in the case of the Taxonomy, where the Commission has proposed both simplification and deregulation. Let's take a moment to look at this, as it will help us understand the nature of the changes in sustainability reporting.
Taxonomy
The Commission has put forward two proposals for changes to the Taxonomy. First, there is a far-reaching proposal to limit the scope of companies that are required to disclose their compliance with the Taxonomy. This change is included in „big bus” (I defined the concepts of „large” and „small” Omnibus in the previous edition of the newsletter) and is purely deregulatory in nature. If passed, it will limit the scope of the Taxonomy to a few percent of companies. This sends a clear signal to financial institutions: you are to focus your sustainable finance efforts on providing transition-supporting financing to the largest corporations, while all other companies will have to fend for themselves.
At the same time, in draft amendments to the delegated regulation The Commission has proposed a number of simplifications to how compliance with the Taxonomy is disclosed. I am particularly pleased with the introduction of materiality thresholds, which I have been calling for for over four years, and the simplification of the tables used to report turnover, CapEx, and OpEx indicators (they are now closer to the original proposals I presented to ESMA in the fall of 2020).
Simplification reduces reporting costs for all companies subject to the obligation and is a genuine response to the demands made by organizations representing these companies. Deregulation cuts off more than 90% companies from certain sources of financing, which was not the essence of these organizations' demands. It is a bit like entrepreneurs appealing to the regulator for regulations simplifying the forms that need to be filled out when concluding a contract with a bank, and in response receiving a simplification of these forms AND a ban on granting bank loans to all companies except the largest ones (because applying for a loan is difficult and requires work). I know I am trivializing, but I am describing an effect that will be visible in about three years.
It is also worth noting one more detail. The changes resulting in simplifications go through a fairly standard legislative process: they were developed on the basis of proposals submitted by various stakeholders, with a significant role played by the Platform on Sustainable Finance, and have now been subjected to a short, but nevertheless public, consultation lasting only one month. In contrast, the deregulatory changes were „pulled out of a hat” by the Commission.
CSRD
First „little Omnibus”, i.e., a two-year postponement of obligations. This is a technical measure taken by the Commission, which is fully aware that it will not be possible to reach an agreement between the legislators (Parliament and Council) before 2026, and possibly even later. I have heard voices saying that the „small Omnibus” is supposed to give more time for preparation to companies that would be required to report for 2025. I do not share these opinions, because the excessive size of this second phase of the CSRD has been known since spring 2021. On numerous occasions, my proposals and those of a number of business associations were dismissed with a simple „they'll manage somehow.” In Poland, for example, the number of companies required to report was set to increase 25-fold (twenty-five times) in 2025. We were rushing headlong into a wall and consoling ourselves with the thought that some companies would break through the wall and the passengers from the wreckage would somehow crawl out and hobble on with crutches. The EU regulator and legislator were well aware of this and accepted the situation.
The Commission has included all other proposed changes in the „big Omnibus.” None of them are simplifications. Some of them are pure deregulation, some will cause additional problems, and some look like belated attempts to solve obvious problems.
Limiting the reporting obligation to large companies with more than 1,000 employees is precisely a deregulatory measure. The effect will be similar to that of deregulation in taxonomy. For those who are skeptical, I suggest a careful reading of the report published last week by the European Banking Authority. Report on data availability and feasibility of common methodology for ESG exposures, particularly in terms of conclusions on how the full application of the CSRD to all large companies would benefit (although today we must write „would have the potential to benefit”) the availability of credit for businesses.
The Commission's proposal on the so-called. value chain cap, i.e. the possibility for reporting companies to obtain information from their smaller business partners, is a fantastic somersault. On the one hand, the Commission seems to protect non-reporting companies from a flood of surveys and questionnaires requesting any data and information beyond the closed list. On the other hand, aware that this would be a drastic interference with the freedom to conclude contracts, the Commission opens the door to requesting any other information that is customarily provided in a given industry. Whose? The reporting company's or its small business partner's? Who defines this custom? How does it change over time? The draft of this provision caused champagne corks to pop in all consulting firms and, in particular, law firms last week.
And we can go even further. Last year, I pointed out how EU legislators complicated life for companies (while providing fodder for consultants) by using a definition in the CSDDD („activity chain”) that was inconsistent with the standard definition of a value chain. Well, now it's even better. In the CSDDD, we will apply an approach to the value chain based on a limited definition and risk analysis, and in the CSRD, the value chain will depend on the size of the entities involved in it. After the Omnibus, it was supposed to be simpler, but it will be... at least twice as difficult.
So let's come full circle and see how the new definition of the value chain from CSDDD relates to information. value chain cap in CSRD. It doesn't matter, because the „big Omnibus” excludes value chain cap information necessary to conduct due diligence processes. For those interested, here is a short quiz:
A major business partner sends you a questionnaire to fill out with various data and information. What do you do?
- I am sending back my report in accordance with VSME, because after all, it is value chain cap.
- I am analyzing the current practices in my industry and in my partner's industry with regard to data transfer.
- I ask my partner whether this is for CSRD reporting purposes or for due diligence processes.
- I keep my head down and politely fill out the questionnaire (the third one this week, but 45 of my other major clients have not yet sent their questionnaires).
The Commission also announced the publication of a limited assurance standard. This is a very good proposal, but it is long overdue, as the practice of attestation has been developing for several months now, and I fear that by 2026 it will have stabilized at a level that will make life very difficult for companies. The Commission will be able to issue guidelines on attestation earlier, but these will be non-binding.
The announced lack of ESRS sector standards means that we will not see any simplification of materiality assessments. In addition, there is a growing risk that companies will have to juggle GRI and SASB sector standards, because the failure to issue ESRS sector standards will not suddenly make certain material impacts, risks, and opportunities disappear. However, the number and complexity of questionnaires that reporting companies will send to their business partners will certainly increase.
Who will be better off?
Okay, since I am criticizing the Omnibus, perhaps I should write about who it will make life easier for? Today, I have only a very painful answer to that question and a huge, albeit futile, hope that I am wrong. It will be easier for all non-European companies that feared the increased competitiveness of European companies. Read these two letters Republican congressmen i officials from a number of states, or at least brief overview. Read how Omnibus undermines the competitiveness of EU companies, shaped over decades by European soft power.
We were supposed to get simplifications and facilitations—there are none (except for a few elements related to Taxonomy), but instead we got a deregulation proposal that will make it difficult for most companies to access financing. We were supposed to have protection for SMEs from data transfer burdens, but we got solutions that will add a lot of work for both large and small businesses. We were supposed to have stable and predictable regulations, but what we got was chaos and uncertainty for several months or even years. And all this in a process that prevented companies and other stakeholders from submitting any comments.
After the regulations have been shaken up, we are now facing a period when their final version will be shaped. It is worth watching this process and participating in it as much as we can. Above all, we are faced with solving the actual problems that companies encounter. How can we increase the resilience of our supply chain to geopolitical turmoil and climate change? How can we reduce costs through circular business models? How can we ensure the availability of good-quality resources necessary for building value? These are just some of the questions that can be summed up in one: how to manage sustainability? Because, after all, that is what we are all doing, not „ESG accounting,” but sustainable development. 😊
P.S. Yes, this is the 100th edition of the MATERIALITY ACADEMY newsletter. We sent out the first issue on November 29, 2022. Thank you very much to everyone who reads it or takes a look at it 😊 We will continue to write about everything related to sustainability!
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