The European Union is about to walk back significant chunks of planned ESG regulations, amid a barrage of complaints that such rules are becoming a dead weight hampering EU efforts to compete with the US and Asia.
The European Commission, the EU’s executive arm, has proposed that regulations covering everything from ESG reporting requirements to supply-chain management be watered down to protect business interests in the bloc, according to documents seen by Bloomberg. The final proposal is set to be made public on Wednesday.
The move follows intense pressure both from within and outside Europe to rein in environmental, social and governance legislation. The development has major implications for the future of ESG globally, with Europe accounting for well over 80% of the world’s ESG fund assets.
Read more: EU Plans to Walk Back Key Planks of Toughest ESG Legislation
Germany and France, the EU’s two largest economies, have been lobbying hard for smaller and mid-sized companies to be excluded from the full scope of reporting requirements, as both countries react to faltering economic productivity. In France, a government spokesperson went so far as to characterize ESG corporate reporting rules as “hell” for the companies expected to comply.
Europe’s decision to scale back its ESG agenda comes as American companies enter a new age of deregulation under President Donald Trump. The 78-year-old has taken a sledgehammer to the green agenda of his predecessor, Joe Biden, and has made tariffs a cornerstone of US trade policy.
The EU has also faced more direct pressure from the US to rein in the scope of its ESG regulations. Newly confirmed US commerce secretary, Howard Lutnick, told Republican senators last month that he was willing to consider deploying “trade tools” to ensure American companies exposed to the EU market aren’t expected to comply with CSDDD.
The changes now being proposed by the commission represent “major rollbacks” of the original intention of Europe’s ESG agenda, said David Carlin, the former head of risk at the United Nations Environment Programme Finance Initiative and the founder of D.A. Carlin and Company.
The commission is recommending that the Corporate Sustainability Due Diligence Directive be considerably reined in. That includes lower potential fines and a reduced obligation to monitor the ESG risks of business partners, suppliers and customers. What’s more, CSDDD’s original requirement that companies be exposed to legal liability if their value chains contain environmental or social violations is being dropped.
The Carbon Border Adjustment Mechanism, which will put a levy on EU imports of goods like steel and cement from countries with less strict climate policies, will be softened so that domestic companies face a reduced reporting requirement.
The commission is also proposing that only firms with over 1,000 employees and annual revenue exceeding €450 million ($470 million) be subject to the full scope of both the Corporate Sustainability Reporting Directive and CSDDD. Doing so would exclude an estimated 85% of the companies originally targeted in CSRD, and would be in line with German and French demands.
Meanwhile, a provision for so-called double materiality — a concept that requires companies to take into account not just the financial ESG risks they may face but also their environmental and social impact — looks to be intact, according to draft material seen by Bloomberg. Given the proposed cuts to CSDDD and CSRD, however, the provision would likely apply to fewer companies than originally intended.
Read more: US Companies Say ESG Rules Are a Serious Barrier to EU Trade
Other changes proposed by the commission include delaying CSRD reporting by a year and easing requirements around audits and climate transition plans.
A spokesperson for the commission declined to comment, citing a policy of not responding to leaks.
The proposal “will be a welcome development for CSRD reporters,” said Michael Littenberg, global head of Ropes & Gray‘s ESG, CSR & Business and Human Rights compliance practice. However, more clarity is needed around the granularity of reporting requirements for the companies that remain in scope, he said.
“Denmark, France and Germany, among others, have called for the reporting requirements to be scaled back,” Littenberg said. “The commission presumably will do so through separate delegated acts. However, to aid compliance planning by companies and reduce unnecessary work, they hopefully will preview the plan when the omnibus proposal is released.”
Lawmakers from the EU’s green bloc, meanwhile, were quick to denounce the planned adjustments.
“It is an illusion to think that dismantling sustainability laws will solve the structural problems of the economy,” said Anna Cavazzini, a green lawmaker who’s chair of the internal market committee, in an emailed comment.
She says Europe’s competitiveness problems are instead “due to the current China shock, to a lack of innovation, to high energy prices brought by the war of aggression against Ukraine, and to insufficient investment. They are certainly not due to the EU due diligence law, which is not even in force yet.”
The European Sustainable Investment Forum, also known as Eurosif, added its voice to the list of critics.
The adjustments to the regulations are “massive,” said Eurosif Executive Director Aleksandra Palinska. The commission looks to be proposing “drastic changes to the scope of sustainability reporting rules,” to an extent that “will limit investor access to comparable and reliable sustainability data and impair their ability to scale-up investments for industrial decarbonization and long-term growth.”
The commission is due to unveil its proposal for the so-called omnibus legislation on Feb. 26, when the bloc will look at CSDDD, CSRD and the Taxonomy Regulation.
Maria Luis Albuquerque, the EU’s financial services commissioner, said in an interview last month that there’s room for adjustments to ESG rules, while noting that outright deregulation isn’t the goal.
It’s about “adjusting the pace,” while “maintaining the anchor,” she said then.
But civil society groups are now questioning that characterization.
The planned rollback of ESG regulations looks “reckless,” said Maria van der Heide, head of EU policy at nonprofit ShareAction. “Sustainability laws designed to tackle the most pressing crises – climate breakdown, human rights abuses, corporate exploitation – are being crossed out behind closed doors and at record speed. This is not simplification, it’s pure deregulation.”
Photograph: Wind turbines and the Boxberg lignite coal-fired power plant, seen from Teichland, Germany, on Tuesday, Nov. 7, 2023. Photo credit: Krisztian Bocsi/Bloomberg
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