‘Wrong signal’: watering down Omnibus criticised

The European Parliament has voted in favour of reducing the scope of its sustainability reporting and due diligence directives. The negotiating position adopted on Thursday also removes the requirement for companies to publish Paris-aligned climate transition plans.

382 members of the European parliament voted in favour of restricting sustainability reporting requirements to companies with over 1750 employees and a net annual turnover of €450m. The restriction also applies to disclosures under the EU taxonomy rules which include a classification of sustainable investments.

In addition, the standards that these disclosures would be subject to would also change – fewer qualitative details and sector-specific disclosure is no longer mandatory. Similarly, due diligence requirements will only apply to companies with over 5000 employees and a net annual turnover of over €1.5 bn.

Crucially, companies are no longer required to publish a transition plan that discloses how their business model is aligned with the Paris Agreement.

Investment signal

Politicians’ explanation of the vote has focused on the push for simplification. “Today’s vote shows that Europe can be both sustainable and competitive. We are simplifying rules, cutting costs, and giving businesses the clarity they need to grow, invest, and create well-paying jobs”, said rapporteur of the legal affairs committee Jörgen Warborn.

However, the changes imply a significant reduction in the scope of mandatory climate-related disclosures. For European institutional investors, this potentially erodes visibility over information that investment decisions are based on. Consequently, it could have the opposite effect – a reduction in European climate investment leadership.

“Today’s vote weakens Europe’s leadership in building a competitive and sustainable economy”, says Aleksandra Palinska, executive director of Eurosif.

“It sends the wrong signal to responsible investors and companies committed to accelerating the transition to a low-carbon and resilient economy. Removing 95% of in-scope firms from sustainability reporting and scrapping mandatory climate transition plans is an obstacle to industrial decarbonisation and long-term growth”, she adds.

Investor interest

This reduction in investor visibility over the energy transition is set against the backdrop of European institutional investors looking to invest in transition funds. The SFDR reform, due to be announced next week, is likely to include a new transition fund category.

Research conducted by the European Securities and Markets Authority (ESMA) shows that since 2022, the popularity of EU-domiciled transition funds has risen sharply, with nearly €30bn now managed by 121 actively managed transition funds.

Thursday’s vote also contradicts investor demands communicated to lawmakers earlier this year. In July, 77 investors signed a statement calling for the core elements of Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards

(ESRS), and the Corporate Sustainability Due Diligence Directive (CSDDD) to be protected.

The statement links these directives to investors’ ability to allocate capital to climate solutions and transition technologies. It specifically called for the requirement for transition plan disclosures to be preserved and sustainability disclosures to extend to companies with over 500 employees.

“Regulatory simplification can be achieved without compromising on the substance of sustainability rules”, the statement reads. Signatories to the statement include Norway’s largest pensions provider KLP, Danish asset owners AkademikerPension and PKA as well as the New Zealand Superannuation Fund.

Negotiations based on these changes will now begin with EU governments, with the aim of finalising legislation by the end of the year.