The Omnibus Rollback: A Wake-Up Call for Businesses and Investors

The urgency to stop climate change and pursue climate action has never been clearer. Unfortunately, recent policy shifts in the European Union (EU) delineate a glaring trend, which is the rollback of crucial sustainability initiatives through the Omnibus package. Specifically, the measures of Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) have been lowered, which reduces the responsibility of corporations in the battle against climate and heightens transparency issues. Future changes are impending, and we need to keep a vigilant eye out for them.

Why It Matters

• Fall of Adequate Corporate Accountability – Under the CSDDD, recent amendments have limited due diligence requirements and obligations to business partners, reducing responsibility for corporations. There was also the removal of the “last resort obligation,” which told firms to stop doing business with non-compliant suppliers. These shift the burden of solving climate change away from corporations.

• Reduced Transparency Could Lead to Investor Risk – The CSRD has also been reduced under Omnibus rollback, which only covers the largest companies and eliminates obligations for 80% of firms to report. Additionally, independent auditing has been reduced, making it harder for investors to see performance.

• Carbon Border Adjustment Mechanism (CBAM) Loophole – The EU has exempted many companies from the Carbon Border Adjustment Mechanism (CBAM). CBAM aims to impose carbon tariffs on imports. The proposed change puts a threshold at 50 metric tons, which leaves many companies exempt.

• Future Proposed Amendments – Andreas Rasche also said that “According to reporting by Responsible Investor, some countries in the Council even pushed for further changes. France suggests moving the threshold on CSDDD to 5,000 employees (which would align with the country's own due diligence law), the Netherlands "would like to extend the delay proposal to the first wave of reporters under CSRD", and Czechia thinks that the Commission needs to aim for more than just 25% burden reduction.”

Details

Because the EU is scaling through the Omnibus, corporations are stepping back from their climate commitments. BP, one of the world’s largest oil companies, scrapped its renewables targets and their goal of refocusing on fossil fuel investments. Despite this, investors continue to demand sticking to Paris Agreement targets. Financial institutions like DBS Group and CIMB Group are adhering to their commitment to the Net Zero Banking Alliance (NZBA).

Additionally, the Omnibus package could have ripple effects in Europe and beyond. The EU is setting a precedent that may influence other global markets and countries. Many countries that once looked to the EU as a leader can use this shift as an excuse to lower environmental sustainability standards, which will lead to corporations prioritizing short-term profits over long-term sustainability.  Carbon emissions have creeped up steadily since the 1960s and are projected to continue.

Philippa Nuttall, Editor of Sustainable Views at Financial Time, indicated that, “many in business and industry, however, believe the EU executive is on the right track as far as the Corporate Sustainability Reporting Directive is concerned — even if the uncertainty created by the process is unwelcome.” Corporations said that complying with these directives would be too expensive. They would also require tasks that overlapped and provided the exact outcome. While these arguments have merit, they overlook the broader benefits that the directive will bring. Initial investment in compliance is outweighed by strategic benefits that help corporations proactively mitigate ESG risks and put businesses ahead of their competitors.

Simply put, we will see less data about ESG from fewer companies. The EU’s proposal to restrict mandatory reporting to big companies “means that 80% of businesses would not be in scope for the Corporate Sustainability Reporting Directive (CSRD) any longer,” said Andreas Rasche. Ultimately, the EU faces an interesting, complex decision. Reducing burdens on smaller business will lead to lower compliance costs. However, it also jeopardizes the necessary data for assessing genuine progress on sustainability commitments.

The EU has paradoxically said that they remain committed to the Green Deal. Rasche reported that, “The European Commission emphasized that they remain fully committed to the long-term objectives of the Green Deal. However, I think cutting back the reporting regime and due diligence regime in such a significant way will make it harder to collect data that is needed to check where exactly we stand in terms of progress against Green Deal goals. So, I think it is fair to talk about a softening of the sustainability agenda, not necessarily in terms of the end goals but in terms of the process that the EU believes will get us there. But to be fair, we also need to acknowledge that the EU introduced some measures that push for further change. Most of this is put under the umbrella of the so-called Clean Industrial Deal. This new deal will, for instance, push investments into clean manufacturing.”

While the European Commission affirms its commitment to the Green Deal, recent discussions and decisions have drawn a line between goals and implementation. Significant rollback of processes that are critical for transparency compromises the commission’s ability to accurately track progress towards the goals they have set out to achieve.

Action Steps: Businesses

• Continue to Reach Targets – Although the Omnibus may make it tempting to stop working towards sustainability, corporations should continue to strive to reach sustainability goals and targets.

• Commit to Transparent Reporting – Corporations should also adhere to established ESG standards like GRI and TCFD, which can in turn attract investment from institutional investors.

Action Steps: People

• Support Policy Advocacy – People should lobby and urge for the maintenance and increase of sustainability requirements. Although it might not result in immediate action, spreading the goal and message can inform others of the right thing to do.

• Demand Accountability – Concerned citizens should also discuss with companies to ensure they maintain sustainability strategies despite regulations becoming less stringent.

As regulatory requirements falter, businesses and investors must take the lead in ensuring that a net positive economy is reached. The risks of inaction have already been shown through extreme weather, financial instability, and disruptions in the supply chain. While these risks continue to mount and become more threatening, the world must stick to ensuring a sustainable future for our future generations.