The key problem underlying the EU’s omnibus discussion is not the desire to simplify. Simplifications are welcome as they help to better align key regulations and thereby also support implementation. The key problem is that the EU based its desire to simplify on a misleading narrative; a narrative that sees reporting and due diligence as a cost burden which undercuts competitiveness.
This misleading narrative has contributed to a situation in which simplification turned into deregulation.
The Dominant Cost Narrative
Narratives matter because they clarify why sustainability reporting and due diligence matter. However, instead of building a convincing value narrative around the regulations, the Commission and the Draghi Report emphasized the cost narrative – the claim that simplifications will cut compliance costs and that a reduction of such costs will boost the competitiveness of businesses.
This cost narrative has introduced a trade-off into the debate: you can either have quality sustainability data from a critical mass of companies or you can have competitiveness. Empirically speaking, there is little evidence for the link between reduced reporting costs and higher competitiveness. A comprehensive impact assessment, which the Commission did not carry out, could have at least brought some more clarity. However, since both the CSRD and CSDDD are rather new regulations, studying this link is also difficult, as companies do not have long-term experiences with costs and benefits.
It is also known that costs decrease over time as organizational routines develop, the initial costs of setting up a system are overcome, and market actors (e.g. auditors and consultants) build up best practices. So, from a pure compliance cost perspective, rolling back regulations shortly after they are introduced makes not much sense.
'Post-Omnibus' – Building a Stronger Value Narrative
Declaring sustainability reporting and transparency on emissions a competitive disadvantage may appease populist and revisionist sentiments. But it is not a winning strategy for Europe‘s future. What is needed now is courage and pride and a firm belief that sustainability and competitiveness are not a zero-sum game but the only way to safeguard a healthy and safe future. Europe has a historic opportunity to demonstrate that sustainability and competitiveness can go hand in hand.
The cost narrative has given rise to a situation in which companies underestimate the business value of sustainability reporting and due diligence. Statements such as this one are widespread these days: “Reporting does not create any value or impact. It is just a bureaucratic exercise to collect and analyze data.” Of course, companies differ in how far they follow this sustainability-as-burden logic, but several business associations and governments have emphasised this point during the omnibus process.
If the omnibus proposal is turned into law, many companies will face no legal pressure to report anymore. It is therefore vital to weave a new narrative around the CSRD and CSDDD – a narrative that adequately captures the interplay between reporting, due diligence and corporate value creation. Elements of this narrative already exist. For instance, many have rightly emphasised that CSRD is, strictly speaking, a management framework and not just a reporting standard. The problem, however, is that this value narrative has not been tied together yet to gain sufficient traction and attention. The competing cost narrative was too dominant and, in a sense, an easier sell in a context where many European firms are struggling.
Collecting and analysing ESG information creates values in many ways, for instance it helps to price externalities and can support capital allocation, it enhances a firm’s understanding of key strategic risks (e.g., value chain disruption), it helps to incentivise and motivate employees, and it also improves relations with key external stakeholders. How reporting and due diligence interact with firm-level value creation depends on how exactly a company creates value. There is no silver bullet. The point is that an improved value narrative around the CSRD and CSDDD needs to shape the rationale (the “why”) that underlies firms’ engagement with such regulations.
Reporting also provides investors with essential data to improve decision-making. One original motivation behind the CSRD and the Taxonomy framework was to reorient investments so that they align with the objectives of the EU Green Deal. However, only collecting such data from big corporations risks creating an incomplete picture. In light of the omnibus discussions, the EU banking regulator has already warned that lack of data standardisation and comparability could present significant challenges for banks.
More Than Just Compliance
Moving from a cost to a value narrative does not imply to blindly trust in the business case for sustainability. There is not always an immediate business case for corporate sustainability. Many companies need to search for how ESG issues and their own competitiveness interact in positive and meaningful ways. This is hard work. The point is that management frameworks like the CSRD and the CSDDD were designed to help with this task, and this must be better acknowledged.
We need a new ‘post-omnibus’ narrative for sustainability, a narrative that moves us beyond the artificial choice between having ambitious sustainability regulations and being competitive. It is time to strengthen this narrative and to anchor it much better in corporations. Understood in this way, the omnibus also provides an opportunity for us to rethink which rationale should underlie firms' sustainability engagement... It must be more than just compliance.
This article is also published on LinkedIn. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
