If there’s one thing business leaders tend to dislike more than regulation, it’s regulatory uncertainty. By that measure, 2025 has already gotten off to a tough start as lawmakers and regulators around the world have begun reexamining their approaches to corporate sustainability requirements. While the lion’s share of news has recently focused on the sustainability about-face unfolding in the U.S., the situation has also become more complex for businesses that operate in Europe, where major components of the European Green Deal that were expected to come into force this year have now been delayed.
At the center of the issue is the Omnibus Simplification Package, an initiative that was formally introduced this week by the European Commission to harmonize and simplify existing sustainability mandates. Although the ink is still wet on the Omnibus Package, many column inches, thought pieces and commentaries have already been written ranging from accusations of “sell out” to applause for taking this “brave step.” As with all new initiatives it will take companies a while to digest and understand what this will mean specifically for them.
In a nutshell, the Omnibus packages are driven by the recent report, A Competitiveness Compass for the EU, to address “overlapping, unnecessary or disproportionate rules that are creating unnecessary burden for EU businesses.” Directives and regulations in scope for this simplification include the Corporate Sustainability Due Diligence Directive (CS3D), Corporate Sustainability Reporting Directive, Taxonomy Disclosures and the Carbon Border Adjustment Mechanism, among others.
Advocates for the approach say it will help to streamline sustainability reporting, reduce the reporting burden on businesses and ultimately strengthen all the initiatives. Critics have warned that the proposed amendments will create confusion for businesses, not least the fact that number of companies in scope for the CSRD will be reduced by about 80% – many of which have already put in place systems to comply with the originally agreed directive.
Simplification Is Rarely Ever Simple
Surprisingly, even before the publication of the draft proposal, some of the most vocal critics have been the businesses themselves who would be regulated by these mandates. In January, a group of major multinationals including Mars, Nestle, Primark, Unilever and several others signed a letter to the EC in which they argued that it would be better for everyone if the Commission would just move forward with its sustainability regulations as planned.
“We are concerned about the potential for others to use this process to call for the legislation to be reopened for political renegotiation,” the letter explained. “Parts of the legislation are already in force, and companies have already invested significant resources in preparing for and meeting the new requirements. Predictability is critical to the ability of all actors, including businesses, to make informed decisions.”
The word “predictability” is an important one. We saw a very similar sentiment late last year in the letter to then President-elect Donald Trump from the Alliance for Automotive Innovation, an organization representing 42 automobile manufacturers, which suggested that ending electric vehicle incentives would harm the auto industry. “To remain successful and competitive, the auto industry needs a stable and predictable regulatory environment,” the letter stated.
For the businesses at the center of these shifts in regulatory sentiment, the volatility behind the regulation is often more difficult to manage than the regulation itself. In the case of preparing for the CSRD, CS3D and EU Taxonomy, multinational companies have spent a lot of time over the past several years building the infrastructures needed for the collection and collation of the data they need to report on their sustainability-related risks and opportunities. They’ve made adjustments to their supply chains and vendor screening processes. They’ve invested in analytics and forecasting capabilities. They’ve retooled manufacturing processes and reimagined sourcing. And, in most cases, they found that their businesses were running better for the effort.
Lots Of Stakeholders, Lots Of Opinions
However, with the mandates they were preparing for now significantly amended, postponed, on hold or already rolled back, many are getting frustrated that instead of implementing the programs they’ve spent so long building, they may have to go back and relook at their objectives. Business leaders aren’t the only ones growing weary of the regulatory volatility and uncertainty. Investors and civil society groups have also weighed in on the topic. The Institutional Investors Group on Climate Change, the European Sustainable Investment Forum, and the Principles for Responsible Investment, along with a group of 162 institutional investors representing approximately €6.6 trillion assets under management, have already petitioned the EC hoping to influence the proposed Omnibus directive, and a group of prominent civil society stakeholders have also raised concern with the process.
Meanwhile, the EC is getting pressure on the other side from the likes of Germany and France, both of which argue that compliance requirements associated with these instruments would place an undue burden on businesses operating within their borders. No doubt, political leaders throughout Europe are looking at the trend toward deregulation in the U.S. and thinking about how it might affect them if European companies are held to a higher standard of sustainability.
Focus On The Fundamentals
How will it all shake out? It’s hard to say, exactly, but for anyone looking for a clue as to what the future of sustainability disclosures will look like, the climate reporting standards introduced by International Financial Reporting Standards Foundation’s International Sustainability Standards Board are a good place to start. Unlike the much more politicized mandates being debated around the globe, the IFRS standards are rapidly becoming the de facto obligations for corporate sustainability reporting, with respect to climate disclosures. This is largely because they are focused on the basics of financial reporting and risk management. Companies are adopting the standards relatively seamlessly and, slowly but surely, they are becoming the norm for climate disclosure.
In many ways, the roll-out of the IFRS standards serves as a good guide for businesses on how to focus on sustainability reporting amidst all the noise out there right now. By focusing on the risks, the potential upsides, and the solid financial metrics behind both, the emotion is removed from the equation. It will be interesting to see how the various stakeholder groups, including companies and investors, will now react to both U.S. deregulation and the proposed EU Omnibus. At the moment, a wise company would be one that doesn’t see these developments as a license to stall or walk away. Risk management, value creation and protection are still very much key factors of the sustainability equation. Are we seeing a seismic shift from governmental regulation of business to self-regulation? My belief is that yes, we are. But for how long? Only time will tell.
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