How the Omnibus proposal sets the foundation for a deregulation agenda

What is the Omnibus Proposal?

A major shift is underway in how the European Union governs finance. Following the EU’s “simplification agenda”, several Omnibus packages will propose a sweeping set of reviews of legislative files towards what’s being called “better regulation”. 

The Commission kicked off its so-called simplification planning with the Omnibus I Proposal – a first wide-reaching package of legislative changes that could weaken the sustainability rules meant to keep our economy and financial system fair, stable and accountable. In theory, it aims to reduce so-called ‘regulatory burdens’ on businesses in the name of economic competitiveness. Nevertheless, critics state that the rushed package violates the commission’s own Better Regulation rules and fear that it will weaken workers’ rights and environmental protections, contract termination mechanisms in case of breach of international rules, and sets forth a deregulatory agenda. 

Many of the rules relating to sustainable finance and financial stability are still in the middle of being implemented, and diluting and delaying them now could undo years of work to make the financial system safer, fairer, and more transparent. 

The European Commission’s proposal published on 26 February introduces major changes in the name of “competitiveness”, including:

• A reduction of the number of companies subject to reporting requirements by 80% to 85%
• A dilution of the requirement for companies to develop a transition plan to meet global GHG emission reduction targets
• A reduction of the due diligence requirement for companies to identify and stop human rights and environmental breaches in their chain of activities

This will mean less data to assess the corporate behaviors of companies, less corporate accountability when partnering with companies in sectors at risk from a human rights or an environmental perspective and limitations for financial institutions to assess the impact of their investment and their exposure to sustainability risks. In other words, it’s a rollback of crucial transparency and protections just when we need them most.

The risks of regulatory rollbacks

The belief that regulation is by construction impairing competitiveness because it generates an additional cost is not correct. Transparency and accountability are also a source of competitive advantage from many angles: harmonisation of information to compare with competitors, better oversight of key risk metrics, reputational improvement, and so on. When rules are stripped away, risks don’t disappear – they’re simply pushed onto workers, taxpayers, and the environment. 

Reducing transparency may reduce the costs for companies in the short term, but will exacerbate economic instability stemming from environmental and social concerns. Yet, while short-term profits are privatised, the longer-term costs of deregulation will be socialised.

Here’s a breakdown of the key areas under threat from the Omnibus I Proposal:

1. Rules to fight greenwashing

Laws requiring companies and investors to report how they impact the environment could be weakened. This would make it easier for companies to make false “green” claims without backing them up, undermining the EU’s climate goals. 

Moreover, the Omnibus I will impact the ongoing revision of a set of rules, the sustainable finance disclosure regulation, that aims at clarifying key sustainability concepts to qualify financial products as sustainable and counter greenwashing.

2. Management of sustainability risks

After the 2008 crash, new rules (known as Basel III) were introduced to make banks safer and prevent future bailouts. In light of the growing risk stemming from climate change and other environmental concerns, additional provisions have recently been added to ensure a better consideration of ESG risks in the risk management framework of banks and reflect this risk in their capital requirements. 

However, managing this risk implies collecting the information to assess the actual exposure of banks’ counterparties. The Omnibus could therefore jeopardize the application of the banking prudential framework.

3. Legislative uncertainty

Most companies with more than 500 employees are busy publishing their first Corporate Sustainability Reporting Directive (CSRD) report on the financial year 2024. While the exercise required substantial work to interpret the new rules and align with auditors, it is expected that the reporting process will be smoother for the next report. 

However, half of those companies could be soon excluded from the scope of CSRD and are left in uncertainty on whether they should prepare for their next reporting. This would send a very bad signal as it would penalize (1) the frontrunners that have invested resources in the enhancement of their data quality and reporting tooling and (2) companies that are located in countries that have already transposed the CSRD (initially required in 2024).

Why is this happening now?

The Omnibus I is not a one-off; it’s part of a broader deregulatory wave in Europe and beyond. In the US, the new Trump administration is moving swiftly to roll back financial regulations. In response, European leaders are under pressure to ‘keep up’ by cutting red tape and speeding up growth. The dominance of the right and far-right in the EU, coupled with those growing headwinds from the US, has led to a rushed policy proposal aimed at slashing reporting requirements – without properly considering companies’ interests or assessing whether the EU will still be able to meet its sustainability goals. The growing concerns over sovereignty and the financing of defense also push some political parties to oppose or amalgamate investments in sustainability and investments in defense. 

In fact, the Omnibus – as proposed by the Commission – sets the foundation for a deregulation agenda. Decreasing the availability of necessary data will necessarily jeopardize the impact of the rest of the sustainable finance framework and limit the potential of resolving the weaknesses of the transparency framework.

Let’s defend the rules that protect us

Finance Watch warns that the drastic reduction of the scope of the CSRD and the Taxonomy goes beyond simplification and increases legislative uncertainty. Moreover, excluding medium sized companies could lead them to continue receiving multiple data requests in various formats and generate additional costs for them.

The CSRD is a fundamental piece of the sustainable finance framework and protecting its scope, while making the ESRS more workable, should be the priority to avoid a domino effect that would remove most of the substance of the sustainable finance achievements.

At Finance Watch, we’ll be:

• Publishing evidence-based briefings and reports;
• Engaging directly with EU institutions;
• Mobilising a community that can #ShiftTheBalance of the conversation on deregulation in Europe and beyond

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