Postponing EU sustainability reporting rules and covering fewer companies is insufficient

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BrusselsReport.eu
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By Otto Brøns-Petersen, director of analysis and Line Andersen, economist, at Danish think tank CEPOS

The Draghi-report concluded that excessive EU regulation is detrimental to the competitiveness of European companies. Following the report, the Commission published a Competitiveness Compass for the EU. The conclusions are clear: The EU needs to boost productivity growth.

While the potential of some of the recommendations in the Compass to boost productivity is questionable, other recommendations appear to have actual potential, particularly those that focus on reducing regulatory burdens for European companies. Regulatory burdens are a hot topic these days, as the Commission has published one of several omnibus packages with the purpose of simplifying reporting requirements.

The Commission will simplify, among other things, three EU green regulations that affect businesses: the corporate sustainability reporting directive (CSRD), the corporate sustainability due diligence directive (CSDDD), and the EU taxonomy. Some of the amendments mean postponing the implementation of CSRD by two years and that only large companies with more than 1,000 employees and €450 million in turnover would have to comply. According to the existing regulations, CSRD applies to all large companies. The Commission estimates that the proposal will reduce the number of companies in scope by 80%.

Although the objective of the green regulation could be well-intentioned, it is encouraging that the Commission is now making somewhat of a U-turn. The green regulation involves 1,200 indicators from which businesses must identify their sustainability reporting. Even though, according to a sustainability data management platform, the number of data points for reporting for most businesses will fall below 700, it still leaves excessive burdens on businesses.

It is clear that the regulation will bring substantial costs for businesses. In the Danish implementation of CSRD, it is estimated that the directive will incur recurring costs of almost €1 billion per year to comply. These figures do not account for the additional costs faced by smaller businesses, which are not directly affected by the requirements. Furthermore, the measurement of burdens does not consider the negative impact of regulation on economic growth, suggesting an underestimation of the regulatory costs. It is important to note that these figures refer only to Danish companies and represent 0.3 pct. of Danish GDP. While this is far from trivial in itself, it is crucial to consider the fact that this is only one of numerous regulatory obligations imposed by the EU.

Costly regulation might be justified if the regulation were to bring large gains to society. However, the Commission does not seem to lift the burden of proof. The purpose of sustainability reporting is to help investors, civil society organisations, consumers and other stakeholders to evaluate the sustainability performance of companies. While clients have a legitimate right to demand sustainability reporting from businesses if they are willing to pay for it, the fact that regulation is necessary to ensure that companies report on sustainability indicates that the market is not willing to pay the actual price for this information. If no one is willing to pay the actual price, that suggests that the benefits do not justify the costs.

Others will argue that the green regulation is necessary to meet the EU climate targets. However, it is a misunderstanding that there is a need for more climate regulation than an Emissions Trading System (ETS). EPICENTER has recently published a report that describes the ideal climate policy in the EU. In the EU, the most important and significant climate policy is the ETS. The ETS prices emissions, which ensures a cost-effective green transition. A key feature of the ETS is that the number of allowances determines the total amount of emissions within the sectors covered, meaning that if other regulations try to decrease emissions and thus reduce demand for allowances, only the price of allowances will be affected rather than the actual emissions from the EU. Therefore, requiring businesses to report on their climate footprint will not affect the total emissions from the EU. In fact, by making the green transition less cost-effective and by not only encouraging but requiring corporate greenwashing, it could easily be argued that EU lawmakers are doing a disfavour to the climate.

That being said, climate regulation in the EU has potential for improvement. The Commission has the opportunity to benefit Europeans by greatly reducing the costs of the green transition. This will require even more ambitious reform, including the abolition of double regulation, such as sustainability reporting requirements, and reform of the ETS so that a single ETS covers emissions from all sectors.

It is, therefore, good news that the Commission, with the omnibus, is trying to tackle the excessive reporting requirements. However, the omnibus could benefit from being even more far-reaching. The fundamental problems of sustainability reporting will not disappear by covering fewer companies and postponing the regulation. The omnibus is a step in the right direction, but if the Commission is serious about boosting productivity growth, it needs to walk the talk and actually take a stand against burdensome regulation.

 

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