EU Prepares for Fight Over Contentious Rule: ESG Regulation

The European Commission signaled it may protect a contentious ESG reporting requirement when it unveils plans for simplifying the bloc's sustainability rulebook next week. 

The requirement in question is the so-called double materiality provision. Introduced by Europe a decade ago, it forces companies to disclose not only the ESG financial risks they face, but also the environmental and social impact of their business. Whether to keep it has become a flashpoint in the battle over how to simplify the EU's environmental, social and governance regulations. 

Economy Commissioner Valdis Dombrovskis this week told lawmakers worried that the double materiality provision won't survive the coming review that their concerns are being taken seriously.  

"We hear what you are saying and we understand that it's indeed an important point in the context of European Green Deal," he said. Dombrovskis also noted that the EU remains mindful of the need not to stray too far from the International Sustainability Standards Board, which focuses on financial materiality in corporate reporting. 

On Feb. 26, the commission is due to unveil long-awaited proposals on how to change three key pieces of ESG legislation: the Taxonomy Regulation, the Corporate Sustainability Reporting Directive, and the Corporate Sustainability Due Diligence Directive. EU Commission President Ursula von der Leyen has made clear simplification is the goal 

"It's key we keep double materiality," said Member of the EU Parliament Pascal Canfin, who was among lawmakers Dombrovskis addressed in a meeting this week. "I will be satisfied when I will see the final proposal from the commission," he said in an emailed response to questions. 

European companies have complained that the rules hurt their ability to compete globally, especially as the Trump administration forces through a wave of deregulation in the US Europe's two largest economies, Germany and France, are calling for delays in enforcing the rules and for significant reductions in the number of companies in scope  

Against that backdrop, double materiality has stood out as a uniquely European interpretation of ESG. CSDDD, for example, is designed to make companies legally liable for ESG violations such as environmental contamination or human rights abuses in supply chains.  

Europe now faces pushback from outside its borders. Howard Lutnick, the newly appointed US commerce secretary, told GOP senators last month he'll consider using "all available trade tools" to protect US interests against the impact of CSDDD. 

3-5-Year Phase-In of the Legislation

Banks and investors, meanwhile, are lobbying for the bloc to hold on to its ESG regulations, with CSRD in particular seen as a necessary tool to aid portfolio and loan-book management. 

As overwhelming as CSRD is," what the directive brings is "more transparent, consistent disclosure" which goes beyond Europe, said Jacomijn Vels, global head of sustainable solutions group at ING Groep NV. "It would be a pity if that gets lost."  

The first set of companies in scope of CSRD has already started reporting. Early analysis of those disclosures suggests that investors and other stakeholders will have an easier time comparing companies ESG metrics, said Maximilian Mueller, a financial accounting professor at the University of Cologne and a co-founder of the Sustainability Reporting Navigator, which is tracking CSRD reports.  

Most key performance indicators "are now commonly defined," and that makes for "better benchmarking," Mueller said. Before, "it was basically a mess.” 

Originally published in Bloomberg.