Overview of Adjustments to ESG Regulations
The European Union is poised to revise significant portions of its environmental, social, and governance (ESG) regulations, responding to widespread concerns that such rules are becoming a hindrance to the EU’s ability to stay competitive with the United States and Asia. As per documents reviewed by Bloomberg, the European Commission, the EU’s executive body, is advocating for the easing of regulations related to ESG reporting and supply-chain management to better align with business interests within the bloc. The final proposal is scheduled for public release on Wednesday.
International and Internal Pressures
This development follows mounting pressure both within Europe and internationally to moderate the ESG legislative agenda. Europe’s decision bears significant implications for the global future of ESG, given the region’s dominance with over 80% of the world’s ESG fund assets. Germany and France, the EU’s largest economies, have been particularly vocal in advocating for exemptions for smaller and mid-sized enterprises from exhaustive reporting requirements. This move comes amid concerns about declining economic productivity in these nations.
In France, government officials have gone so far as to describe ESG corporate reporting mandates as burdensome for companies. The EU’s reconsideration of its ESG policies coincides with a new era of deregulation in America under President Donald Trump, who has dismantled the green initiatives of his predecessor, Joe Biden, and emphasized tariffs in trade policy.
Specific Changes in the Proposal
The commission’s proposed changes indicate a substantial rollback of the original ESG legislative goals, according to David Carlin, former head of risk at the United Nations Environment Programme Finance Initiative. Proposed amendments to the Corporate Sustainability Due Diligence Directive (CSDDD) include reducing potential fines and minimizing obligations to monitor ESG risks within company value chains. The original directive’s imposition of legal liability on companies for environmental or social violations within their value chains is also being reconsidered.
The Carbon Border Adjustment Mechanism, intended to levy charges on EU imports from countries with less stringent climate policies, will be moderated to lessen domestic companies’ reporting duties. Furthermore, the proposed regulations would apply only to companies with more than 1,000 employees and annual revenue exceeding €450 million ($470 million), thereby excluding approximately 85% of firms initially targeted under the Corporate Sustainability Reporting Directive (CSRD).
Despite these alterations, the concept of ‘double materiality’—requiring companies to consider their financial ESG risks and their environmental and social impacts—remains intact, though applicable to fewer companies than initially anticipated.
Reactions and Future Steps
The proposed changes have drawn criticism from various quarters. The EU’s green lawmakers have expressed concern, arguing that dismantling sustainability laws will not resolve the structural economic issues, which they attribute to factors like the ‘China shock,’ lack of innovation, high energy prices, and insufficient investment rather than the EU’s due diligence laws.
Eurosif, the European Sustainable Investment Forum, has criticized the scale of proposed changes, warning that they will limit investors’ access to reliable sustainability data necessary for industrial decarbonization and long-term growth. The commission plans to present its proposal for the comprehensive legislation, including CSDDD, CSRD, and the Taxonomy Regulation, on February 26.
Although the EU’s financial services commissioner, Maria Luis Albuquerque, has acknowledged room for adjustments in ESG rules, she emphasizes that the aim is not deregulation but rather pacing the reforms while maintaining fundamental goals. However, civil society groups have labeled the planned rollbacks as reckless, arguing that critical sustainability laws are being dismantled rapidly and without sufficient transparency.
