Frustration as the EU Omnibus ignores the misalignment problem
Europe’s co-legislators are beginning to provide a glimpse into how they will push forward revisions to the Corporate Sustainability Due Diligence Directive (CS3D), Corporate Sustainability Reporting Directive (CSRD) and Taxonomy Regulation.
More information about Member States’ current thinking on the Omnibus proposal circulated this week, and public debates are underway in Parliament, too.
While Council and MEPs have both suggested further interventions to simplify or cut the scope of the three laws, it’s becoming increasingly clear that no one is planning to make them more coherent.
The elephant in the room
“The misalignment between all these rules is not being talked about at all,” says Linda Romanovska, head of sustainability consulting at Materra.
“Each regulation is still being addressed in its separate silo with separate consultations and regulatory processes. I guess because it’s so complex.”
Romanovska was a member of the Platform on Sustainable Finance that advised the Commission on the technical aspects of files like the Taxonomy and the Sustainable Finance Disclosures Regulation.
She was also an observer of EFRAG, the body that oversees the development of the European Sustainability Reporting Standards that underpin CSRD.
There are clear contradictions in some of those laws, she notes.
Under CSRD, for example, the term ‘impact’ must be used to describe the effect a company has on the environment, but in the adaptation section of the Taxonomy Regulation, it refers to the potential effect of climate change on business activities.
“Users of these reports are going to be very confused when the same word has the opposite meaning in one chapter than in the rest of the document,” says Romanovska.
“As a minimum we need to clearly acknowledge these differences in terminology use.”
Clashes beyond the ‘Omnibus laws’
Because the regulations are shaped by separate advisory bodies, overseen by different parts of the Commission, and tracking their own timelines, it’s perhaps unsurprising that they ended up being misaligned.
But the inconsistencies aren’t just between the three files themselves: a blog published last month by the British Institute of International and Comparative Law explored the hurdles faced by companies trying to marry their obligations under CS3D with the EU’s new Artificial Intelligence Act.
“The interaction between AI-specific and general due diligence requirements may create overlapping and potentially conflicting obligations for large companies,” wrote author Dr Irene Pietropaoli, adding that the point at which a company can consider itself to have satisfied both laws is currently unclear.
Last week, BusinessEurope called out conflicts between transition plan requirements in CSRD, CS3D, the EU Emissions Trading System and the Industrial Emissions Directive.
The trade association insisted it was “paramount that consistency prevails in EU legislation on transition plans”.
Company frustration
Ingka, owner of Swedish furniture giant IKEA, is among the companies frustrated by the absence of solutions to these issues in the current omnibus.
“There remains different definitions for key concepts, such as ‘value chain’, ‘materiality’, ‘stakeholder engagement’, ‘business partner’ and ‘sustainability impacts’ across the three laws,” a spokesperson for the firm told Real Economy Progress.
These mismatches, he added, “create inefficiencies between internal teams, and risks a lack of understanding amongst external audiences looking for information about our business”.
Ingka is therefore urging the EU to do more “to help enhance consistency”.
No sign of progress
But so far, there seems little appetite from Council, Parliament or the Commission to do so.
The Council document that circulated this week suggested Member States are keen to deal with some misalignments – Spain called for a discussion about “the mechanisms required to ensure coherence between the CSRD and relevant sectoral regulatory frameworks”.
But it was referring specifically to rules related to prudential requirements for banks and insurers.
Real Economy Progress asked the Commission if it had a plan to address the duplications and contradictions that haven’t been addressed by its omnibus proposal.
A spokesperson pointed to the Commission’s recent commitment to meet with stakeholders twice a year to “help identify issues of poor implementation, gold plating, over-compliance or fragmentation, and uncover opportunities for simplification and harmonisation”.
Businesses will be a key part of those ‘reality checks’, and their views will inform annual progress reports, the stress-testing of existing legislation and “the design of future simplification proposals,” the spokesperson said.