The European Central Bank (ECB) has raised a series of concerns over potential data shortages if corporate sustainability disclosure requirements are pared back as proposed by the European Commission, in an opinion endorsed by the bank’s governing council.
If adopted, the proposals under the Omnibus package would apply the Corporate Sustainability Reporting Directive (CSRD) to companies with more than 1,000 employees and either a turnover above €50 million or a balance sheet total above €25 million. Companies with 250 employees and above would have been captured by the original legislation.
Companies not in scope of the rules will still be able make disclosures through voluntary sustainability reporting standards developed by EU standards body EFRAG.
But the ECB said voluntary reporting could result in “self-selection bias”, with disclosures primarily made by class-leading companies. The ECB also emphasised that voluntary reporting “will not be subject to any form of verification”.
“These issues can lead to systematic and unquantifiable bias in the computation of aggregate sustainability information by data users,” the ECB said, making it harder for banks to manage risks and for central banks to obtain accurate data, and deliver on their mandates.
“For these reasons, the ECB recommends better calibration of the scope of mandatory sustainability reporting in order to capture a sufficiently large reporting population.”
The ECB has proposed that companies with more than 500 employees but fewer than 1,000 should report against “simplified sustainability reporting standards, to be developed and adopted by the Commission”.
It also asked the Commission to retain most climate-focused datapoints under the CSRD and “along with the most important data points” for diversity.
EU standards body EFRAG has been tasked by the bloc to substantially reduce the datapoints under the regulation by October.
In February, European Banking Authority (EBA) defended the original formulation of the CSRD, saying it anticipated “a positive effect” on the availability of granular and comparable ESG data that banks have access to if fully implemented.
Financial sector and CSDDD
The ECB also pushed back against proposals to entirely remove financial institutions from consideration when enforcing the Corporate Sustainability Due Diligence Directive (CSDDD).
One of the proposals intended to slash sustainability red tape under the EU’s Omnibus package is the deletion of a clause which will require the European Commission to review whether the financial sector should be included within the CSDDD scope by July 2026.
“Regulated financial undertakings should not be treated differently from undertakings in other sectors,” said the ECB. “This will also help to create greater certainty around financial institutions’ obligations in this area and around climate and environment-related litigation risks for the financial sector.”
Due diligence requirements, if fully implemented, would help financial institutions ensure that sustainability matters are integrated into “decision-making and risk management practices”, the ECB added.
However, the supervisor acknowledged that the original timeline of the review clause did not provide sufficient time for implementation and proposed delaying the review by four years to July 2030.
In March, German association Finanzwende published research alleging that EU trade bodies engaged in “intense lobbying” to secure the financial sector carve-out from the due diligence rulebook.
Transition plans
Finally, the ECB said that Omnibus amendments to CSDDD which would make the implementation of climate transition plans “subject to administrative supervision” could undermine the intent of the legislation.
“There is a risk that the revised drafting may be misinterpreted as meaning that undertakings are obliged to adopt transition plans but not to implement them.”
The ECB has recommended a redrafting of the proposals “to ensure that transition plans are put into effect”.
Separately, 30 legal academics last week wrote to express concern over the Commission’s proposal to remove the obligation for companies to implement transition plans as part of CSDDD would increase litigation risk.
EU states have a legal obligation to regulate corporate greenhouse gas emissions, and the scholars said this would not be met if corporates do not implement their transition plans.
The European Climate law requires the EU to become climate neutral by 2050 and to reduce GHG emissions by at least 55 percent by 2030.
“Removing, weakening or delaying keystone legislation” on mandatory corporate transition plans exposes member states to further litigation and undermining legal certainty for companies, the academics said.
The second concern related to the risk of a fragmented internal market. The academics noted that the Commission’s impact assessment of CSDDD found that a growing number of companies are being sued for causing harm, which “may be the consequence of the lack of clear regulatory requirements”.
Any watering down of the legislation will therefore only lead to more litigation, the letter said, as member states will seek to fill these regulatory gaps, creating “uncertainty, inefficiency and a fragmented legal framework”.
Finally, the academics said the absence of an obligation to implement transition plans may “promote greenwashing” and therefore increase legal risks.
They also stressed that transition plan requirements under CSDDD and CSRD should be co-ordinated to enable coherent implementation.