In February, the European Commission (EC) unveiled proposed changes to EU sustainability disclosures, known as the EC Omnibus I. While positioned to lighten
regulatory burdens and unlock investment, these proposals – particularly concerning the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) – raise significant concerns for asset managers.
The EC claims these reforms will provide
€6 billion
in “administrative relief” and free up “public and private investment capacity of €50 billion to support policy priorities.” However, a closer look suggests potential unintended consequences that could hinder sustainable investment.
Reception and unspoken impacts
For companies already preparing to meet CSRD, little changes immediately. Many have invested heavily in compliance, the Omnibus package still awaits final
approval, and some companies will welcome the reduced burden. However, activists
and trade unions have voiced concerns that the reforms dilute the fundamental goals of promoting genuine corporate sustainability and tackling greenwashing.
But the EC’s announcement didn’t mention significant downstream impacts on regulations like the Sustainable Finance Disclosures Regulation (SFDR), EU Benchmarking,
and EU Green Bonds. These frameworks rely on corporate sustainability data. With the proposed reforms removing 80% of companies from CSRD’s scope, the availability and quality of sustainability data for asset managers are now in question. The concern is that
this may fundamentally reduce the data they have available to help make investment decisions.
The quality of sustainability data was already a challenge in this industry. The EU now seems to be making this hurdle several metres higher.
Why the buy side needs a strong CSRD
Let’s rewind a little.
It all comes back to the
European Green
Deal – a set of initiatives designed to reduce greenhouse gas emissions, promote sustainable investments, fund research and innovation, and safeguard Europe’s natural environment.
Following this, the EU realised that they had perhaps dropped the ball in terms of thinking through the impacts, and how data would flow between reporting
entities. CSRD was then brought in to increase the availability, consistency and quality of
nonfinancial
information reported by companies. This was a good step to helping standardise the information asset managers could access to make the right capital allocation decisions and manage risk,
as well as providing enough data for investments and later reporting.
So CSRD was supposed to close the ‘data gap’, but the Omnibus reforms appear to undermine this goal.
Further, proposed changes to CSDDD, represent a massive watering-down of the depth to which companies need to audit their supply chains. CSDDD was to ensure
comprehensive supply chain assessment, even including tier 2 and tier 3 contributors. The new wording is now focused more on direct suppliers, and says companies won’t have to audit their supply chains beyond that, unless “…the entity
has
plausible information that suggests an adverse impact.”
CSDDD was the guidance on how companies should behave to ensure the sustainability and resilience of their supply chains, whereas CSRD was supposed to be
how companies report that behaviour for stakeholders. This could be another blow for asset managers, as a relaxation in the regulation of supply chain behaviours reintroduces additional risk.
So what now? A view from the buy side
From talking to our clients in the asset management space, there is frustration, bordering on exasperation. Asset managers still have to satisfy SFDR, despite
the EU pulling the data rug out from underneath them. They also need to allocate capital, now with far less intelligence for due diligence.
The EU Green Deal aimed to transition the bloc to sustainable modes of production through market transparency, using reporting like SFDR as tools to incentivise
institutions to improve sustainability. Transparency is crucial for institutions to consider sustainability risks and opportunities in capital allocation and play their part in a real-world economic transition.
Ultimately, reduced data quality from sustainability reporting impairs market transparency and hinders the alignment of capital flows with EU sustainability
goals. That “€50 billion to support policy priorities” might now not be flowing where the EC thinks it will.
What will asset managers do?
Without quality data to rely on, asset managers are going to have to resort to investor models or estimates where there are gaps in the data – in short,
they will have to rely on some element of ‘guess work’, which adds a significant risk back into their decision making.
We expect that now, even the ratings agencies and data providers will continue to extrapolate, estimate, and use proxies for unavailable data, so even third
parties will be less able to provide accurate investment intelligence. Many in the market may also be thinking: ‘If the EU can flip-flop like this, what is to stop them from doing it again?’ Given the rollback on ESG policies from the United States and other
areas, will the EC alter course even further?
One step forward, several steps back
The Omnibus proposals, if adopted, will drag sustainable investments and reporting back to the ‘bad old days’ of working with poor data quality and incomplete
coverage.
Another concern is that what’s left of CSRD is now going to be focused on quantitative data points, when sustainability risks and opportunities can’t always
be measured with numbers. The old adage still holds true, that not everything that counts, can be counted.
Asset managers will now operate on lower levels of data quality to guide them in launching new thematic funds, and will now struggle to categorise funds
as article 8 or article 9 under SFDR.
We know that there are changes coming to SFDR too, with an announcement expected in
Q4
of this year, and one would think that the EU will lighten some of this burden, now that it has weakened the availability of quality data. But again, what will any of that mean to the true
spirit of these regulations, to protect the planet and all its people? And when these reviews are over, will the EC allow asset managers enough data to guide capital allocation decisions in areas where the EC wants them to invest?
“Do no significant harm” is a key principle in the EU’s sustainability framework, it’s just a shame they don’t currently seem to be including asset managers
in those protections.
