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Pragmatic but toothless: the Omnibus exposure drafts
Senior Sustainability Strategist, Rebecca Ward, explores the risks and rewards of the latest ESRS exposure drafts
Europe set a bold ambition. To be the first climate-neutral continent by 2050. Bold ambitions require bold legislation.
Enter the EU Green Deal – its aim is to transform the EU into a modern, resource-efficient and competitive economy. The CSRD is a central component of the Green Deal – focused on reporting requirements and, ultimately, business transformation.
Boldness is a sliding scale, but for its scope, scale, use of double materiality, and reference to context-based sustainability, CSRD fell on the bolder end of the scale.
The thing with being bold is that you really have to stick to your guns. The good folk at the EU council did not get this memo. The backlash to the “burden” of CSRD was loud, and in response the EU launched the Omnibus proposal – a package that aimed to simplify and streamline EU sustainability regulations.
The ESRS exposure drafts (representing the outcome of the Omnibus process) are now published, and we can assess the damage done.
Our opinion:
Simplification was desperately needed and achieved.
But in places, that simplification has come at the expense of rigour and robustness. As well as simplification, we now have the threat of deregulation.
Pragmatic simplification
We always believed in the “spirit of the law”. That means taking a pragmatic approach to disclosures and an audience-centric approach to reporting. Now, the standards more clearly reflect this point of view.
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It is now explicit that materiality should be used to determine relevant disclosures across all standards (ESRS 2 included).
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Report structure is now more flexible. Reports can include executive summaries, and more granular information can be held in appendices (many were already doing this).
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The topical standards are broad in scope. Businesses now have the freedom to only report disclosures related to material sub-topic within a standard.
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Duplication of disclosures in both the standards themselves, and resulting reports, has been removed.
From bold to … meh
Reducing the burden on businesses while maintaining support for the bold ambitions within the EU Green Deal was always going to be tricky. Unfortunately, it seems the latter has been well and truly derailed.
We’ve picked out a number of the major changes that concern us and outlined their implications for efforts to create a more sustainable European economy.
Change 1
The change: references to align plans to adapt a company's strategy and business model in line with context-based principles, have been watered down. Specifically, references to planetary boundaries and biosphere integrity in the objectives section of the Biodiversity and Ecosystems standard have been removed, and references to aligning the business model to emissions reductions in line with a 1.5-degree scenario have been watered down in the Climate Change standard.
The problem: incremental improvements to make businesses ‘become less bad’ no longer work in a world that’s increasingly underwater and on fire. We need a shift. We need companies to demonstrate how they’re amending their business model and strategy to operate in a sustainable economy. To do that, we need businesses to set goals to move toward operating within planetary boundaries and social norms.
Change 2
The change: in efforts to clarify what is meant by a positive impact in materiality terms, businesses can now claim mitigation of other business’s negative impacts as a positive impact.
The problem: with no guardrails for the level of mitigation required to claim positive impact, there’s danger of a slippery slope here. Businesses being able to lay claim to positive impacts that barely scratch the surface is misleading, and will ultimately slow down sustainability-related progress.
Change 3
The change: all disclosures related to anticipated financial effects have been removed. The justification given for this is a lack of mature methodology. And, specific to the Biodiversity and Ecosystems standard, the requirement to conduct a resilience analysis with respect to biodiversity and ecosystems has been removed.
The problem: businesses make decisions based on the financial implications – both the cost of action and potential to realise opportunities or mitigate risk (e.g., based on resilience analysis findings). If we are to build buy-in with senior leaders to make more sustainable business decisions, evidence of the financial implications of action (or inaction) is vital. What’s more, innovations (and maturing of methodologies) are born out of the need to adapt to changing external factors. Regulation is a major external factor for many businesses.
Use your voice
There is still time to share your thoughts as part of the public consultation. If our conclusions chime, use your voice to help keep the integrity of CSRD and get in touch if you’d like to talk more.