Sustainability insight | 07 Feb 2025 |

Travers Smith's Sustainability Insights: All aboard the unstoppable omnibus

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A regular briefing for the alternative asset management industry.

The previous European Commission, under its President Ursula von der Leyen, spent five years building a ground-breaking set of sustainability regulations for the corporate sector: a complex classification system, or taxonomy, of "green" activities; the world's most comprehensive sustainability disclosure rules, based on detailed reporting standards; and a truly novel sector-agnostic regime to hold companies to account for their environmental and human rights impacts, including in their value chain. The EU's member states and (especially) the European Parliament encouraged and supported those initiatives, as did many large businesses.

Now the new European Commission, still led by the re-elected von der Leyen, and with strong support from the Parliament and member states, has announced that it will dramatically simplify these rules – but has not yet decided how or when.

That leaves businesses in an unfortunate position. Many have been diligently preparing for the new regimes. Now they are trying to work out which of those preparations are still needed.

What do they have to go on? There are the almost daily leaked reports of closed-door meetings and Commission working papers, and various cryptic (and sometimes contradictory) statements by EU policymakers. But it is all speculation. At this stage, no one knows where this "simplification revolution" will lead, or how long it will take – not even the Commission itself.

Clearly, this is not a good way to regulate.

The market is now waiting for 26 February, when a document with more detail of the proposed changes is expected (although most of its contents will probably leak in advance, and there are now reports that it will be pushed to March). That document will tell us more about the Commission's plans, which are still being developed, but businesses should not expect that document to provide certainty. The Commission has launched a political process – and, once launched, its course is unpredictable.

So, do we have any information that can guide asset managers and their portfolio companies in the meantime?

First, there does seem to be an emerging consensus that the Corporate Sustainability Reporting Directive (CSRD) should include a new "mid-cap" category (currently expressed as being for "small" mid-caps). Companies that are larger than small and medium-sized enterprises (SMEs) but not listed or very large (whatever that means) would have a less demanding set of reporting obligations – or, according to some reports, none at all.

If it wanted a quick win, the Commission could apply its pared back standards for listed small and medium-sized enterprises (SMEs) to that new mid-cap category. That would reduce the number of data points for those companies, potentially without much delay to the effective date of the reporting obligation for those companies.

        
    
"Significant changes will bring politics to the fore, and the politics is clearly difficult for the EU at the moment."

Some additional, but still not radical, moves that the Commission could propose include a relaxation of the assurance requirement in the early years, and giving companies the option to report on a best-efforts basis. The Commission and its advisory body, EFRAG, has for some time been urging companies to adopt a proportionate and pragmatic approach – which is all very well, but it does not align with the text of the law. Perhaps this is an opportunity to correct that.

However, many business groups and industry associations are calling for a pause in implementation (at EU and member state level, given that some countries have already passed their CSRD laws) to allow time for proper consultation and impact assessments. That now seems increasingly likely – and would at least provide some measure of interim clarity to companies that are in the midst of their preparations.

Changes to the Corporate Sustainability Due Diligence Directive (CS3D) are less urgent, because the effective date is still a few years away, and may be less dramatic – although some reports this week suggest a significant scaling back is also on the cards. Perhaps, given the recognition by many scientists that the Paris Agreement's goal of limiting global temperature rises to 1.5C is now unlikely to be achieved, the obligation to prepare a Paris-aligned transition plan will be softened. In any case, policymakers have already signalled that they will align the CS3D and the CSRD transition plan rules.

But the significant changes mooted will need approval by the Parliament and (a qualified majority of) the member states. And they will strike at the heart of the compromises reached over the last five years, some of them very hard-fought. That brings politics to the fore, and the politics is clearly difficult for the EU. It is already pushing the Commission further than they may have wanted to go when von der Leyen first announced the simplification in November.

The shift to the right in the European Parliament following the elections last summer had already moved the needle, and von der Leyen's re-appointment as President required her to adopt a different tone, compounded by concerns about EU competitiveness. Her own party, the EPP, is now calling for significant changes to the sustainability rules – and is also (rightly) questioning the law-making processes that led to them. Furthermore, the debates will now be held in the shadow of a trade war, and the German elections looming at the end of the month. That all points to fairly dramatic change.

There will be a dizzying array of developments over the coming weeks and months, and it will be hard to keep up. Some will argue vociferously that the EU should not turn its back on what they see as the EU's achievements on sustainability law since 2019. Many NGOs, some politicians, investors and businesses are saying just that – and many are very angry with the process the Commission has adopted. But whether those interest groups have the political capital to secure their victories is far from clear. Even less clear, in fact, than whether an EU-based mid cap company will have to prepare a CSRD report in 2026 and, if it does, to what standard.

To hear more of our speculation on the omnibus proposal, listen to our podcast.