Investor groups split over omnibus

Opinion is divided on whether the European Union’s plan to reform its sustainability regulation will benefit institutional investors.

The European Commission tabled a legislative proposal on Wednesday that would reduce the number of companies required to explain their impact on environmental and social issues, and the opportunities and risks those issues will present to their business models, by around 80%.

The scope of the EU’s Taxonomy Regulation is defined by those rules (Corporate Sustainability Reporting Directive, CSRD). This means the same firms will also be excused from explaining how their business activities and spending decisions contribute to the bloc’s sustainability objectives.

“We’re concerned that the changes could deprive investors of vital information,” said Nathan Fabian, chief sustainable systems officer at the Principles for Responsible Investment.

He believes the reductions “go too far” and “risk creating legal uncertainty, data gaps and transaction costs for investors and companies”.

Richard Gardiner, head of EU policy at the World Benchmarking Alliance, said the Commission’s proposal removes a key link in the chain required for the EU to meet its climate goals.

“The financial sector’s ability to deliver on financing the Green Deal and the Sustainable Finance Action Plan, etc, is essentially greatly hindered,” he argued.

Many benchmarks, indices, fund strategies and ESG ratings have been designed based on the current European Sustainability Reporting Standards (ESRS), so they can pull the corresponding data starting to be published under CSRD and Taxonomy.

“They’re packaging that information in a way that’s useful to the financial sector, based on the portfolios they have and the sectors they’re involved in,” said Gardiner.

He added that there is a contradiction between the EU’s plan to finance the climate and social transition by channelling Europeans’ savings into sustainable businesses, and cutting data about which businesses are sustainable.

“The two things cannot be true at once,” Gardiner said.

“Going from 50,000 companies that would have to be much more transparent, to about 7,000, doesn’t give the intermediaries the ability to take our savings and put them into sustainable portfolios, because the information won’t be there.”

Not a complete setback

But not everyone agrees that the omnibus proposal is a setback.

In a statement published on Thursday, PensionsEurope acknowledged that European pension funds need comparable information to make good investment decisions.

“Transparency and good reporting by companies on their sustainability impact are important to pension funds as investors,” it wrote, but added that “not all information is equally useful, and removing unnecessary rules and burdens for companies is necessary”.

Likewise, the European Fund and Asset Management Association (EFAMA) welcomed the omnibus proposal, describing it as “a positive and necessary step to increase the competitiveness of European companies and reduce regulatory burden”.

In particular, EFAMA praised the Commission for abandoning sector-specific standards under CSRD, and for preserving the double-materiality approach.

Both EFAMA and PensionsEurope pointed out the need to ensure reductions in the scope of corporate reporting are reflected in the Sustainable Finance Disclosure Regulation, so that investors are not required to provide information about the social and environmental performance of their portfolio companies that they will no longer have access to themselves.

EFAMA also noted that delays and reductions would “leave asset managers waiting longer for the corporate ESG data needed to make sustainable investment decisions”.

“In the interim,” it said, “investors will have no choice but to continue to rely on ESG data and ratings sold by third-party providers.”

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