The European Parliament has rejected a proposal on reforming the EU’s sustainability laws, sending negotiators back to the drawing board.
At a plenary session on Wednesday, Members of European Parliament (MEPs) voted 318 to 309 against a compromise text for the Omnibus I package, which will amend the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CS3D) and the Taxonomy Regulation.
The text had been developed by Parliament’s legal affairs committee, known as JURI, which signed it off last week.
Securing wider parliamentary backing remains the final step before political negotiations with the European Commission and Council can begin.
“The mandate that JURI had worked up was a compromise between the demands of the main parties, but it was ultimately rejected very narrowly in yesterday’s plenary vote,” explained Leo Donnachie, a sustainable finance policy specialist at the Institutional Investor Group on Climate Change (IIGCC).
Most of those who opposed the proposal sit on the far right or left of Parliament. The former wants bigger cuts to the scope and coverage of the law, while the latter is pushing to keep more of the original legislation intact.
“Now we go back to the drawing board,” Donnachie said.
MEPs are now expected to vote on a revised proposal at the next parliamentary plenary, which will be held on 13 November.
“In that interim period, there is scope for further amendments to be made and we could end up in a worse position,” he continued.
He said that the current text had retained many of the priorities for IIGCC’s members, including the double materiality principle, some requirements for climate transition plans, and an acknowledgement of the value of sector-specific reporting guidance.
“Any more dilution than we got this time around, and we start seriously jeopardising the ability of these laws to deliver on the outcomes they’re designed to achieve.”
Under the current proposals from Parliament, the scope of CSRD would be reduced so that it only applies to EU companies with more than 1,000 employees and net annual turnover above €450m, and non-EU companies that generate more than €450m of turnover in the EU.
That is estimated to be just 4,700 firms, compared with the 11,000 the law currently covers.
“That means that even fewer companies will have to report on sustainability compared with the Non-Financial Reporting Directive,” noted Richard Howitt, a former MEP and current sustainable finance adviser.
The NFRD is the sustainability disclosure law introduced in 2014, which the Commission vowed to strengthen by replacing it with CSRD.
Howitt said that, even without further dilution, Parliament’s position on the Omnibus package “puts back the quest for sustainability by more than a decade, at a time when its need has intensified by many times”.
Stronger protections ‘not guaranteed’
The compromise text will also stop companies covered by CSRD from requesting sustainability information from their smaller suppliers, and will significantly weaken the obligation for businesses to produce and implement climate transition plans.
The cuts to CSRD, CS3D and the Taxonomy are being sought as part of a wider political commitment to make the EU more business-friendly by deregulating.
“The argument is that sustainability reporting is contributing to European companies’ inability to compete with other companies elsewhere in the world,” said Phillip Blumenthal, the head of sustainability at Code Gaia, a German-based firm specialising in sustainability disclosure.
“The question for investors is, does having robust, standardised sustainability information help them in their decision-making process?”
If institutional investors do favour companies that are transparent on environmental and social topics, he suggested, they should be more vocal about it.
“Because the argument hasn’t been made strongly enough when it comes to the return on investment for companies [that] have to prepare these reports.”
For Donnachie, yesterday’s vote is “reflective of the intensity of feeling” on sustainability topics among EU politicians.
“It could also be a precedent for other really crucial votes that are coming up,” he said.
The EU is currently in the midst of heated negotiations about its 2040 climate target, and revisions to laws on deforestation and carbon pricing.
“So it’s a bit concerning, and, while there may be good intentions to try and go back to the drawing board and get stronger protections for the [Omnibus I] package, I don’t think we can guarantee that.”
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