EU sustainability cutbacks make low-carbon leaders harder to spot

A reduction in scope of the European Union’s sustainability disclosure rules may cut red tape for businesses but investors say less transparency will make it harder to identify which companies are genuinely moving toward low-carbon operations.

After months of pressure from companies and governments, the European Union has agreed to sharply scale back two flagship sustainability disclosure laws.

The changes affect the Corporate Sustainability Reporting Directive (CSRD) — the EU’s rulebook that requires large companies to publish detailed information on their environmental, social and governance performance, and the Corporate Sustainability Due Diligence Directive (CSDDD), which requires firms to check their supply chains for human rights abuses and environmental harm.

The CSDDD had also required companies to have and implement a plan to cut emissions to net zero, but that obligation has now been dropped.

Watering down the rules means investors will have less reliable, comparable information on companies’ sustainability efforts, making it harder to tell which businesses are serious about cutting emissions, managing climate risks and environmental, social and governance standards.

Eleanor Fraser-Smith, Head of Sustainability at investor Victory Hill Capital Partners, said the weakening of the rules would "leave investors with poorer information for decision-making”.

"Yes, EU reporting has become overly complex, but the solution is clearer guidance and better structure, not dilution. Stepping back from requirements doesn’t make the system easier, it just makes it less coherent.”

Some investors highlighted the scrapping of climate transition plans in the EU’s due diligence law as a major concern.

"Without credible transition plans, Europe could lose comparability, visibility on progress and a potentially useful tool to access transition finance. Investors rely on these plans to assess climate risks and opportunities,” said Carlota Garcia-Manas, head of climate transition at British investor Royal London Asset Management, which manages around £180bn ($239.53bn). Hortense Bioy, Head of Sustainable Investing Research at industry tracker Morningstar Sustainalytics, said the changes would put the onus on investors to assess whether companies follow through on their promises.

"The responsibility will increasingly fall on asset managers offering these strategies to hold companies accountable.”

Under the changes to CSRD, only companies with more than 1,000 staff making more than €450mn would report, with financial firms excluded.

For CSDDD, the threshold was even higher at 5,000 staff and €1.5bn in net turnover, with a delayed start-date and breaches dealt with at the national rather than EU level, with added flexibility for companies on what to report.

Hans Stegeman, chief economist at sustainability-focused lender Triodos Bank, said the moves represented a "significant weakening of essential sustainability rules”.

"Legislation meant to combat child labour, environmental pollution, and exploitation in supply chains is being hollowed out. The so-called ‘anti-looking-away law’ has had its scope drastically limited,” he said. Debated since February, the cuts to the EU laws follow months of pressure from companies and governments, who warned Brussels that the rules risked disrupting their gas supplies to Europe. Industry groups welcomed the move as relief from Europe’s complex sustainability regime, among the most ambitious globally.

BusinessEurope Director General Markus J Beyrer said the EU was delivering on its pledge to slash red tape.

"Even with the improvements achieved... it will still be a substantial challenge for companies to comply with the new rules,” he added.

Oliver Moullin, Managing Director for Sustainable Finance at the Association for Financial Markets in Europe, said the changes were a step toward simplification but urged further streamlining.

"Notwithstanding these important simplification efforts, the EU’s sustainable finance framework is set to remain the most ambitious and comprehensive globally,” he said.